You may already know theimportance of keepingtrack of those miles toclaim tax deductions. But how doyou defend your claim against apossible audit? There are severalways to "bulletproof" your automobiledeductions from the IRS. Usingsome documentation strategies maybe a bit painful, but you'll pay a lotless taxes as a result, and have thepeace of mind of not worryingabout an IRS audit. The followingare some useful documentationmethods to choose from:
• The perfect 1-day log method.This is the first method thatmost accountants will recommend.Keeping track of your mileage dailyfrom stop to stop, you recordwhether it's business or personal.Does this work for the IRS? Yes, butthe question is whether it works foryou. Because this may be a bit toomuch organization for many people,there are several easier methodsprovided by the IRS.
• The 90-day log method.Here you would do exactly as youdid under the first method, but foronly 90 consecutive days. During a3-month period, if you put on6000 miles for business and 2000personal miles, 75% of your autoexpenses are deductible (eg, gas,auto insurance, depreciation, washand wax, and repairs). This is a statistical method andassumes that you use your car regularlythroughout the year for thesame business vs personal usage.The IRS will check your appointmentbook to see if your yearlyappointments are relatively thesame from month to month.
• The 1-week-a-month method.This is similar to the secondmethod, but you only need to keeptrack of your mileage daily for 1 weekeach month. The week you chooseshould be the same numbered weekin the month if possible.
• The no-hassle method.This is my favorite approach. Itstarted with a gentleman who usedmethod 1. He had 600 diary entriesin 1 month. He figured that hewas losing money on the timesspent documenting. He had anenormous amount of businessstops each month, but not manypersonal stops. He decided to solelykeep track of his personal andcommuting only. Everything elsewould be business. Thus, youwould only keep track of personaland commuting mileage. The differenceis business. Again, this is astatistical method, and the samecaution that was given under thesecond method applies here.
• The reconstruction method(aka, the desperation approach).With this approach youwould backdate your mileage for 3consecutive months using 6 differentcolored pens. The point is thatyou must have some kind of reasonablemileage log, or all yourdeductions will be disallowed.
Sandy Botkin, a former IRStax attorney and trainer of IRSattorneys, is CEO of the TaxReduction Institute in Marylandand the author of LowerYour Taxesâ€”Big Time! (McGraw-Hill; 2003). He travels nationwide lecturingon tax planning and audit-proofing techniquesfor small and home-based businesses.He welcomes questions or comments at 301-972-3600 or www.taxreductioninstitute.com.