Every once in a while, it pays (in tax savings and avoidance of IRS audit headaches) to go over the basics of claiming automobile business usage and the records required to support the claimed deduction. This is that “once in a while”.
First, absent being excepted from these rules, any vehicle is subject to these rules, which have now been in effect for 40 years. In that time, the IRS has identified 18 types of vehicles excepted from recordkeeping rules as to usage for business vs. personal purposes. A 19th category is conditioned on meeting three specific criteria. The open, 20th category of additional vehicles that the IRS might add to the list has never been used.
Among the 18 specified vehicles are: passenger and school buses; cranes; bucket trucks; cement mixers; forklifts; hearses; and other vehicles not usually used by the general business community for general travel. The 19th category consists of pickup trucks and vans meeting three enumerated, specific criteria:
- Permanent modifications to the vehicle taking up most of the space making personal use impractical (removable shelving will NOT meet this condition, but those welded in place will); AND,
- Company advertising is painted on the side (magnetic, removable signage will not qualify); AND
- There is only a bench seat for the driver and passenger in the front of the vehicle.
As each statement must be true in order for the vehicle to qualify for this exception, failure of any one condition voids the exception for the vehicle.
Vehicles that are NOT excepted, must have records detailing the business vs. personal use generated contemporaneously to justify claimed deductions for business use. Contemporaneous has been defined by the courts to mean records summarizing business use that are created no later than the date that the return claiming the deduction is filed for a particular tax year (including extensions). Records generated after the filing date or that are estimates on their face (typically round thousands and often those ending in zeroes or fives) are rejected by the courts as being just conjectures, resulting in 100% disallowance of any claimed business deductions for use of the vehicle(s).
There are a couple of company policies that may be used to avoid the generation and maintenance of such records, both of which must be in writing. In addition, the IRS must be convinced, in the event of an audit, that they are being adhered to by those using the vehicles.
The first is a written policy of “No Personal Use”. This policy may be used for any and all employees. It requires the vehicle to be: garaged at the company’s property; picked up there in the morning by the driver; used for company purposes, with personal errands allowed that are not out of the way during business travel, during the day; and returned to the company’s property at the end of the day. If the IRS is convinced this policy is acknowledged and adhered to by the drivers, no records are required and no personal use (and no charge back to the driver for personal use) is involved.
The second written policy is more restrictive, in that owners, officers, directors, and relatives may NOT be allowed to subscribe to the policy (the IRS appears to feel that only it is sufficiently independent to evaluate conformity to policies in the case of those disqualified from participation in this policy). This is a policy of “No Personal Use, Except for Commuting”. There must be a good business reason for allowing the driver to take home the vehicle after the conclusion of the business day, i.e.: the vehicle will be parked overnight in an area rife with vandalism; or the employee is on 24-hour call, often with tools and parts, to service property purchased from the business and requiring servicing. There may be other circumstances warranting consideration of the use of this policy, to be evaluated on a case-by-case basis. If this policy is acknowledged in writing by the driver(s) and the IRS is convinced it is followed, the driver is charged as part of their compensation the LESSER of the standard mileage rate for a morning and an evening commute from home to the first business stop (including the office) per day: OR a MAXIMUM of $ 3/day.
KNS has samples of both written policies and is available to assist you in evaluating the policies and procedures in place that are being applied to the use of vehicles provided by the company.
Mark H. Misselbeck, CPA, MST, is a Tax Principal at Katz, Nannis + Solomon, P.C. If you have any questions or would like to speak with one of our tax professionals, please contact our office at 781-453-8700.