This week, Joe Kristan (CPA & Shareholder, Roth & Company (Des Moines, Iowa); Editor, Tax Update Blog) discusses the importance of keeping good mileage records if you plan on deducting expenses incurred in the business use of a car (even an Aston Martin).
There is no short form mileage log for an Aston Martin.
All business. A California aerospace consultant visited his clients in a suitably space-age vehicle — an Aston Martin Vantage. Paleolithic vehicle recordkeeping blew up his car deductions on the launch pad.
The consultant claimed $21,747 in vehicle operating expenses on his 2012 return, along with $21,636 in depreciation expense for the Vantage. That’s a lot of deduction, but then again the Vantage is a lot of car. And, of course, the taxpayer said the car was used 100% for business. And he had proof! Well, sort of. Tax Court Judge Nega takes up the story (my emphasis):
Petitioner testified at trial that he maintained a “vehicle log” and that it was in compliance with the regulations. Petitioner believes that the regulations distinguish between logs for vehicles that are used for business 100% of the time and logs for vehicles that are used for business less than 100% of the time. Petitioner believes that only the latter require a showing of daily activities.
Petitioner’s “vehicle log” is a sheet of paper showing mileage at the beginning of the year and mileage at the end of the year for a vehicle described as “EMEDIA-2”. The paper simply states that the vehicle’s “Business use” was “100%” and reports “Total Business mileage” of 8,900.
Contrary to petitioner’s belief, the Code requires strict substantiation for vehicles used 100% for business and vehicles used less than 100% for business. Furthermore, petitioner must adequately show, through direct evidence or otherwise, that he used his vehicle for business purposes for the amount of time that he claims. Petitioner’s one-page summary is not adequate substantiation of the level of business use and purpose required under section 274(d).
Judge Nega explains what Sec. 274(d) requires for car expense deductions (citations omitted):
To meet these strict substantiation rules with respect to passenger automobiles, a taxpayer must substantiate by adequate records or by sufficient evidence corroborating the taxpayer’s own statement (1) the amount of the expense, (2) the time and place of the travel or use, and (3) the business purpose of the expense. To substantiate by adequate records, the taxpayer must provide (1) an account book, a log, or a similar record and (2) documentary evidence that together are sufficient to establish each element of an expenditure. Documentary evidence includes receipts, paid bills, or similar evidence. To substantiate by sufficient evidence corroborating the taxpayer’s own statement, the taxpayer must establish each element by his or her own statement and by other corroborative evidence sufficient to establish such element. While a contemporaneous log is not required, a taxpayer’s subsequent reconstruction of his or her expenses does require corroborative evidence with a high degree of probative value to support such a reconstruction, in order to elevate that reconstruction to the same level of credibility as a contemporaneous record.
As an alternative to substantiating the amount of each car and truck expense for a given year, a taxpayer may opt to use the standard mileage rate as established by the IRS for that year. By using the standard mileage rate, the taxpayer is not relieved of the obligation to substantiate the amount of each business use of the car or truck (i.e., the amount of business mileage), the time of each use of the car or truck, and the business purpose of each use.
These rules don’t have a “short form” for 100% vehicle use.
Alert tax preparers may spot another problem: the $21,636 claimed depreciation amount. The taxpayer purchased the Aston Martin in 2009. Assuming that is the year it was “placed in service” for depreciation, Sec. 280F and Rev. Proc. 2009-24 would limit the depreciation deduction for 2012 for the vehicle to $1,775 – even with 100% business use.
That’s not the only problem I spot. The taxpayer also claimed a $250 tax prep deduction, which is pretty skinny for a 1040 with a schedule C and depreciation. With tax prep as with cars, you get what you pay for.
The Moral: Keep good records. Any Aston Martin driver worth his California license plates has a smartphone too, so he can keep mileage records on an app (for example, TaxDay). Oh, and if you can afford a Vantage, you can afford decent tax help too.
Roy v. Commissioner, T.C. Summ. Op. 2016-77 (Nov. 15, 2016).
Here’s the rest of this week’s Tax Roundup:
Monday, November 14, 2016
Annette Nellen, California’s Prop 55 – Poor Tax Policy. “Passage of Prop 55 makes it too easy to continue to postpone the work of designing a better tax system.”
Jack Townsend, Swiss Federal Court Limits For Now Swiss Bank Disclosure of Enablers Under DOJ Swiss Bank Program
Jim Maule, Thinking About Chocolate and Taxes. “Current law does not permit taxpayers to claim a medical expense deduction for their chocolate purchases. Nor should it.”
Joseph Henchman, What the Election Results Mean: State Tax Edition (Tax Policy Blog). “Kansas Democrats picked up 12 House seats and 1 Senate seat. Moderate Republicans ousted 14 conservative incumbents in August primary elections, so the net result may be a majority opposed to Governor Brownback’s tax and spending policies.”
Kay Bell, Trump backs off pledge to end Obamacare entirely.
Kristine Tidgren, Family Conflict Signals Need for Estate Plan (Ag Docket). “The largest lesson from this case is that a properly drafted will or estate plan for the mother and her husband, as well as for Larry, could likely have prevented the conflict.”
Mitch Maahs, Military Disability Benefits May be Wrongfully Taxed by the IRS (Davis Brown Tax Law Blog).
Norton Francis, The next recession: are the states ready? (TaxVox). “More troubling, the number of states with reserves over 10 percent fell from 21 states in 2015 to 17 in 2016 and is expected to fall to 13 in 2017.”
Paul Neiffer, Will Section 179 Be Needed Under Tax Reform. “Tax reform may call for immediate expensing of all business investments (other than land). This will be good news for most farmers, but perhaps not all. We explain why.”
Robert D. Flach, Undaunted by election results, Robert D. Flach serves up Monday Buzz! His links today cover fleeing to Canada, state tax implications of the elections, and private debt collection.
Robert Wood, Trump Tax Plan Could Impact 2016 Year-End Planning
Russ Fox, This Isn’t What I Think of When I Hear “Law School” “Mr. Grant paid ‘thousands of dollars’ in yearly membership fees to avoid timely paying his taxes. That got him…very little unless you want to spend 33 months behind bars.”
TaxGrrrl, On Veterans Day, A Look At Special Tax Rules, Including Tax Breaks, For The Military
TaxProf, The IRS Scandal, Day 1283, Day 1284, Day 1285. From Day 1285: “Nearly seven years after it applied to the IRS for nonprofit status, the Albuquerque Tea Party has finally been given a decision: Denied.”
Tony Nitti, Six Tax Planning Strategies To Prepare For A Trump Presidency. “There is one clear victor in Tuesday’s results, however, and that is those who loathe the current tax law and long for reform.”
Tuesday, November 15, 20
TaxGrrrl posts that Trump Says No To Presidential Salary: Could You Decline Your Pay & Cut Your Tax Bill?. But she notes that the government doesn’t take no for an answer: Since compensation is set by statute, Trump can’t actually refuse to take it – just like George Washington, who reportedly tried to refuse a salary but got paid anyway, at $25,000 per year.
Andy Grewal, Trump’s Broad Powers to Revoke Tax Regulations Issued By the Obama Administration (via the TaxProf)
Bob Vineyard ponders Car Insurance that Pays For Routine Maintenance (InsureBlog). ” If all you had to do for routine auto expenses was have the bill sent to your car insurance carrier I doubt many of us could afford car insurance.”
Daniel Shaviro, Aftermath. “It probably comes as no surprise to readers of this blog to learn that I was not pleased, to put it mildly, by Tuesday’s election results. …But I don’t view it as personally constructive to spend my time, as all this gets worked out, agonizing about things that I can’t affect anyway, rather than going on with my life.”
Jack Townsend, DOJ Tax Principal DAAG Recent Review of Activities Related to Federal Tax Crimes. Excerpts from a press release regarding a tax prosecutor’s speech to an ABA tax conference.
Jared Walczak, State Review Calls Virginia’s Economic Development Program Inefficient and Mismanaged (Tax Policy Blog):
Two years ago, Virginia officials posed for photographs with representatives of Lindenburg Industry, a Chinese-owned company with an ambitious plan to invest $113 million and employ 349 workers at an idled manufacturing plant in the town of Appomattox. The Virginia Economic Development Partnership (VEDP) boasted that Virginia had “successfully competed against North Carolina for the project,” which was “a direct result of the Governor’s meeting with company officials in Beijing.” The state provided $1.4 million in Governor’s Opportunity Fund incentives to entice the company to Virginia, with an additional $1.7 million pledged to help renovate the facility. It was a big win for the state, and a rebuttal to the notion that Virginia was falling behind North Carolina in recruiting business to the state.
The only problem was that Lindenburg Industry didn’t really exist.
It appears Virginia’s approach to these incentives was a lot like Iowa’s film credit administration. That’s OK, though. The credits did what they were meant to do: generate photo-ops and press conferences.
Jason Dinesen, I Learn Something New Every Day in this Profession. “When people wonder why it “costs so much” to have a tax return prepared, consider: it’s impossible for a preparer to know every little thing about every nook and cranny of the tax code.”
Kay Bell, Expatriations escalating again. Is it politics or taxes? Taxes, I’d bet.
Keith Fogg, New Developments in the Cases Involving Discharge of Late Filed Returns (Procedurally Taxing). One reason to always file returns on time is that if you have the misfortune to enter bankruptcy, failure to file could leave you on the hook for tax debts you might otherwise escape.
Lew Taishoff, YES, WE HAVE NO DIVIDEND. “In short, it’s time for IRS’ counsel to reread Eustice, Kunz & Bogdanski’s tome on taxation of S Corps. The 2015 edition.”
Megan Randall, Why an unusual coalition defeated Washington state’s carbon tax initiative (TaxVox). “So, why did Washington progressives fight the proposal? It wasn’t primarily the idea of such a tax, which is something of a holy grail of climate change policy. Rather, they objected to how the state proposed to use the $2.2 billion in revenues the plan was projected to generate.”
News from the Profession. Koalas Need to Show Up at Accounting Firms More Often (Caleb Newquist, Going Concern).
Robert D. Flach offers his new 2016 GUIDE TO SCHEDULE A. “This guide is a must for all taxpayers who itemize, or who should be itemizing.”
Robert Wood, 13 IRS Tax Rules Trump Tax Plan Won’t Change. “And as big as the coming tax changes might be, it’s worth noting what is highly unlikely to change.”
Roger McEowen, Rents Are Passive, But They Can Be Recharacterized – And Grouped (Sometimes). “Under another exception, the net rental income from an item of property is treated as not from a passive activity if it is derived from rent for use in a business activity in which the taxpayer materially participates. ”
Wednesday, November 9, 2016
Carl Smith, Seventh Circuit Wonders if a Refund Claim is a Jurisdictional Requirement for a Refund Suit (Procedurally Taxing).
Chicago Sun-Times, Vrdolyak indicted on income tax evasion, impeding IRS. A long-time political figure in Chicago, he served time for charges relating to a “high-profile financial scam” a few years ago. If you can’t trust a Chicago Machine politician to obey the tax laws, what have we come to as a society?
Daniel Shaviro, High-end inequality colloquium, week 4: Alan Viard. The discussion covers an “X tax” type progressive consumption tax.
Howard Gleckman, Don’t confuse Trump’s tax cuts with tax reform (TaxVox)
Jeremy Scott, McConnell, Not Trump, Holds the Key to Tax Reform (Tax Analysts Blog). “For the sake of tax reform, and simply for the sake of a functioning legislature, McConnell should finish Harry Reid’s work and put an end to unnecessary filibusters.”
Jim Maule, Is a Tax Provision in a State Constitution Eternal? No, only temporary tax breaks are.
Joseph Henchman, IRS Regs Could Change in Trump Administration; New Jersey’s Bond Rating Lowered Again; Illinois Shortfall Worse Than Expected; Politico Forum Upcoming on Tax Reform. (Tax Policy Blog). Live by the phone and pen, die by the phone and pen.
Kay Bell, Take advantage of tax-smart philanthropy by donating appreciated stock. “In addition to helping out your nonprofit of choice, your charitable gift of appreciated stock can be a good financial and tax move for you.”
Kerry Kerstetter ponders Tax Changes Under the Trump Administration?
Lew Taishoff, “TELL THE JUDGE I’M BUSY”. “Dear readers, I do not recommend trying that answer in the courtroom, or anywhere else.”
TaxProf, The IRS Scandal, Day 1287. Today’s post links to an item from The Hill, IRS Chief Urges Trump Team to Consider Replacement Soon. For Koskinen, that is, not Trump.
Thursday, November 10, 2016
Career Corner. One Way for Accounting Firms to Pay for Family Leave Programs (Greg Kyte, Going Concern). “The billable hour knows no bounds.”
Jack Townsend, Charging Decisions for Trust Fund Tax Violations. “Trust fund prosecutions have been increasing for a number of years now.” Trust fund taxes are usually withheld taxes held “in trust” for the government.”
Kay Bell gives us 12 tax moves to make by Dec. 31
Keith Fogg, Exiting a Tax Court Case as the Representative (Procedurally Taxing). “The fact that he had to file three separate documents and apparently detail how and on what he spent his time leads me to believe that exiting the case was painful and time consuming for Mr. Pilla.”
Kyle Pomerleau, The Impact of “Options for Reforming America’s Tax Code” (Tax Policy Blog). “Options for Reforming America’s Tax Code“ explains “86 commonly proposed changes to the U.S. tax system.”
Richard Auxier, Missouri voters were sold a bill of (taxable) goods (TaxVox). “When Missouri needs additional revenue, it’ll have to come from an increased sales tax rate. The result: The state will increase the cost of most products sold at Target and Wal-Mart, while leaving countless other purchases untaxed.”
Robert Wood, Trump Tax Cuts Trigger ‘Pay Me In 2017’ Requests, But IRS May Disagree. “If you have a legal right to a payment but elect not to receive it, the IRS can still tax you.”
Roger McEowen, It’s Fall and Time to “Hoop it Up”! “Hoops means one thing when it comes to the hardwood, but it can mean something else on the farm or ranch. A ‘hoop structure’ is basically a shelter that can house livestock (swine, cattle, sheep, goats and horses), but it can also be used to store hay and/or machinery.”
Stephen Cooper, Trump Adviser Suggests 2 Separate Tax Reform Bills (Tax Analysts, $link). Steven Moore suggests moving a business reform bill first. “Individual tax reform, however, could take ‘a year or two’ longer than business reform, Moore said, because lobbyists would be fighting to keep tax preferences and deductions, which would face elimination to pay for lower rates.”
TaxGrrrl, Congressional Staffer Pleads Guilty To Failing To File Tax Return. “Beginning in 2009 through 2013, Avant was paid $170,000 – funded by you and me – but failed to timely file personal income tax returns for any of those years. For the tax years 2006 and 2007, Avant filed returns but, according to prosecutors, those returns each contained false deductions.”
TaxProf, The IRS Scandal, Day 1288. “Judicial Watch announced today that it has obtained 1593 pages of new documents from the Internal Revenue Service (IRS), including notes from a 2011 interoffice meeting revealing a top IRS official admitted that Cincinnati office agents were targeting organizations requesting tax exempt status based on ‘guilt by association’ and ‘party affiliation.'”
Friday, November 11, 2016
A First Amendment Victory. A California U.S. District Court issued a permanent injunction ruling to prevent California from demanding donor information from Form 990 Schedule B disclosures filed with the IRS by nonprofits (Thomas More Law Center v. Harris).
Andrew Mitchel offers 11 New Charts of Foreign Trust Distributions Through Intermediaries. Andrew’s site has a ton of great tools for practitioners like this.
Career Corner. How to Make the Most of Your Time Before Busy Season (Rachel Andujar, Going Concern). “Oh glorious November, you are so sweet to me. You give me a time of low billable hour goals, clients on vacation, and tons of admin hours.”
Des Moines Register, Trustee sues to recoup thousands paid to 80-year-old Dahl’s retiree.
The action filed against Henderson alleges that Dahl’s management “engaged in fraud by misrepresenting and overvaluing the price of the shares held by the ESOP,” or employee stock ownership plan, from 2010 to 2014.
Similar lawsuits filed at the same time targeted those considered company “insiders” under bankruptcy law, but not retirees such as Henderson.
ESOPs have their uses, but they also have serious risks. Both politicians and taxpayers should think twice before encouraging people to concentrate their retirement savings in the stock of their employers.
Howard Gleckman, Taxing Multinationals Can’t Pay for Both Roads and Tax Rate Reductions (TaxVox).
Jack Townsend, NYT Article on Positive Benefits of Remorse and Contrition at Federal White Collar Sentencing. “One of the major points is the positive sentencing benefit that be gained by sincere shows of remorse and contrition.” That might be harder to pull off if you take the case to trial — giving prosecutors one more club to beat defendants into a plea deal.
Jason Dinesen, When Can a Home Office Deduction Result in a Business Loss? “The general rule with home office deductions is that the deduction cannot generate a business loss. But there’s an exception to this rule.”
Jim Maule, Deferring Death as a Tax Planning Tool. Though I have yet to have a client tell me “I’d pack it in today, if it weren’t for the tax bill.”
Joseph Henchman, Mileage Vs. Gas Tax Experiment Begins in Colorado; Recounts Coming in Maine on Marijuana and Income Tax; Rhode Island Considers Catching Up with Neighbor States on Marijuana Legalization (Tax Policy Blog). This “lunch links” roundup also notes that yesterday was the anniversary of the start of the first session of Congress.
Kay Bell, Maryland tax mistake meant $21 million in misdirected city money. Oops.
Keith Fogg, Doing the Right Thing (Procedurally Taxing). “We criticize the IRS regularly here, but today want to point out a case illustrating the effort the IRS and its attorneys at Chief Counsel’s office will go to in order to do the right thing.”
Lew Taishoff, THE LONG AND THE SHORT. “And it takes Judge Laro 58 (count ’em, 58) pages to get there.”
Misha Hill, Chicago, Bay Area, and Boulder Adopt Soda Taxes (Tax Justice Blog).
Robert D. Flach, AGAIN! Well, I abbreviate. “They want tax pros to become Social Workers and do their work for them, and at the same time make it more difficult for us to do our work. They have added multiple hours to the preparation of returns for lower-income clients who can least afford the appropriate additional fees we should be charging for this extra work.”
TaxProf, The IRS Scandal, Day 1289
Tom Houser, Tax Reform on the Horizon? (Davis Brown Tax Law Blog).