Judging from my own experience in the field of tax preparation, there are very few business owners who are not aware that their expenses related to driving their own vehicles for work purposes are deductible. And part of my obligation as an Enrolled Agent is to make sure that my clients claim every legitimate tax deduction for which they qualify. For that reason, I encourage my clients to keep accurate records of their business-related miles so that they can receive the correct and full amount of the deduction they are entitled to receive. It all sounds pretty straightforward, right? Well, I hate to say it, but things don’t always work out as easily as they should.
Please allow me to share a few real-life examples with you to explain what I mean.
Almost all of the tax firms I worked with had free mileage logbooks that we preparers would give to clients who were eligible to claim the business mileage deduction. My colleagues and I would explain the purpose of the booklets to our clients, showing them how the booklet was divided into months, and the months were divided into days. We showed them how to enter a business trip in the booklet, recording the date and purpose of the trip, as well as the starting and ending odometer readings. We told our clients that this was the information needed for us to be able to claim their business mileage on next year’s tax return. “Keep this booklet in your glovebox and make sure you bring it back to us next year,” we would say. In response, the clients would duly look serious and nod their head, and we tax preparers would be content to know that we had helped another client along the way to paying no more than his fair share of tax. However, more than once it happened that when next year came around and I asked to client for his mileage logbook, he would happily hand over the logbook which was still in pristine condition with no entries made in it. “I kept in in the glovebox, just like you said,” he would proudly inform me. Meanwhile, other clients would make entries for only the first month or two of the year, and others would lose it entirely.
Then there were other taxpayers who did not understand the distinction between personal and business mileage. One in particular had been convinced that every mile he drove was deductible. This was based on the fact that he had bought some magnetic signs that he placed on the two front doors of his car to advertise his business. In his mind, no matter where he went in his car, he was constantly advertising his business – even if it was just to the corner store and back to pick up bread, milk, and the newspaper. This earlier article offers insight into the issue of personal versus business mileage.
However, our discussion today is focused on the matter of keeping complete and accurate records. We have seen that logbooks offer a solution to this problem, but they are only as good as their owner allows them to be. In my personal experience, the level of compliance in record-keeping in logbooks has been quite low. In recent years, a number of different software applications that use a smartphone, tablet, or laptop have become available for the purpose of recording business and personal mileage. However, once again the effectiveness of these methods depends entirely on the willingness of the driver to input and maintain their driving data.
Assuming that the taxpayers concerned can be persuaded to actively and consistently participate in record-keeping, the electronic systems offer a series of advantages over the written logbook method. For example:
Accuracy – most mileage tracker apps use GPS technology to automatically record trips. This removes the possibility of miscalculations that can occur when adding and subtracting odometer readings or forgetting to take an odometer reading at the start of a trip.
Data storage – mileage records are stored electronically and are more secure than paper logbooks that can be damaged or lost.
Automated calculations – most mileage tracker apps can also be used to store details of other vehicle expenses. At tax time, this allows for the accurate totaling and comparison of whether a taxpayer is better off to use the Actual Expenses or Mileage method to deduct his business vehicle expenses for the year.
Audit documentation – in case the IRS ever questions a taxpayer’s vehicle deductions, mileage tracker apps can be used to print out a detailed digital trail of the taxpayer’s trips and other vehicle expenses. This record together with the related receipts kept by the taxpayer will provide a comprehensive set of documentation to substantiate the deduction claimed.
As we have just seen, the electronic method of tracking mileage and other vehicle expenses can be much more convenient and comprehensive for use by taxpayers (and their tax preparers). But I would offer the following words of advice to anyone who is considering doing away with the paper logbook:
- Make sure you choose an app that you feel comfortable to use. There are many choices on the market, and most of them offer a free trial. Be sure to select an app that is not too complicated to use for your level of computer skills.
- Continue to keep your receipts, and don’t forget how to tell the difference between personal miles and business miles.
But, no matter whether you choose to go electronic or stay with paper, the main thing is that you should keep complete, accurate, and contemporaneous records.