Q. I’ve had the same job for 20 years. I deduct the same business miles every year but now, the IRS is questioning my miles. I had heard that the IRS offers a 10% or $5,000 leeway on these types of deductions—is this true? Can I estimate mileage deduction as long as it’s close?
Why You Can’t Estimate Mileage Deduction
A. No, this is not true. There is no such thing as a $5,000 or 10 percent “leeway.” The IRS requires that you have adequate records backing up your mileage deduction. If you’re audited, the IRS examiner will ask to see your records.
If you don’t have exact, reliable records, the IRS will ordinarily disallow your entire mileage deduction. This is true even if it’s clear that you did, in fact, drive for business during the year.
The Cohan rule allows the IRS to estimate an expense when a taxpayer lacks adequate records. This does not apply to automobile expenses. Thus, you can’t rely on estimates of your mileage. You also can’t use records you create out of thin air after learning you’re facing an audit.
Rather, you should keep contemporaneous records of your business driving. “Contemporaneous” means your records are created each day you drive for business, or soon thereafter—at least weekly. If you lack such records, you’ll be forced to attempt to prove your business mileage based on your oral testimony and whatever documentation you can provide, such as receipts, emails, and other evidence of your business driving.
For all your business-related drives, you should have a record of the:
- The time and date of the drive
- The total distance of the drive
- Destination of the drive. Although not strictly required, it’s wise to record the start and stop location for more thorough records
- the business purpose of the drive.
The IRS also wants to know the total number of miles you drove during the year for business, commuting, and other personal driving. So, you definitely should not estimate a mileage deduction and rely on the IRS’ leeway.
Q. I’m working for a nonprofit that reimburses 45 cents per mile. This is much less than my actual driving expenses or the standard mileage rate. How do I claim the difference?
A. I assume you work as an employee of the nonprofit. The IRS does not mandate how much employers must reimburse their employees for their mileage if they elect to do so. Such reimbursement can be full or partial. To calculate, use either the IRS standard mileage rate or a fixed and variable rate. The standard mileage rate is 54 cents per mile in 2016. The variable rate is an allowance combining a cents-per-mile rate with a flat amount.
If your employer reimburses less than the full amount, you may deduct the rest as an unreimbursed employee business expense. In your case, you may deduct 9 cents per mile as an unreimbursed employee business expense.
Yet, your deduction is subject to a significant limitation. It is classified as a miscellaneous itemized deduction. This means you can deduct it only if you itemize your personal deductions on IRS Schedule A. If you don’t itemize, you get no deduction.
If you do itemize, you may deduct your unreimbursed business mileage expenses only if, and to the extent, that they, along with your other miscellaneous itemized deductions (if any), exceed 2% of your adjusted gross income. Miscellaneous itemized deductions include amounts you spent during the year for all your unreimbursed employee expenses (including business mileage), investment expenses, tax preparation fees, and hobby expenses (up to hobby income).
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MileIQ’s blog does not constitute professional tax advice. You should contact your own tax professional to discuss your situation.