In order to deduct expenses used while driving one's personal vehicle, taxpayers are required to substantiate the business mileage with a contemporaneous record, a written log or app that documents the expenses.
It is not enough to provide calendar notations that were produced after the fact, observed tax attorney Barbara Weltman, author of J.K. Lasser's Small Business Taxes 2022. She cited a recent Tax Court case in which a consultant who made notations on his calendar could not convince the Tax Court of his business driving.
Nnabugwu Eze reported income and expenses from two sets of activities on Schedule C during 2015 and 2016. He worked as an independent contractor for National Computer Services Consultants, a subcontractor for Northrop Grumman, and as a handyman doing construction and home improvements for individual customers. None of his alleged customers reported payments to him on Forms 1099-MISC. The Tax Court described his expenses for the construction activity as vastly exceeding his reported income.
Eze owned three vehicles during the years at issue: a 2008 Mercedes Benz, a 2002 Ford SUV and a 2004 Chrysler. He testified that he used the Mercedes exclusively in connection with his consulting business, that he used the Ford exclusively in connection with his construction business, and that he used the Chrysler exclusively for personal and family purposes.
The IRS disallowed, for lack of substantiation, deductions for all car and truck expenses for both years. The Tax Court noted that Code Section 274(d)(4) sets forth heightened substantiation requirements for "listed property," which included any passenger automobile during 2015 and 2016.
"No deduction is allowed for vehicle expenses unless the taxpayer substantiates, by adequate records or sufficient evidence corroborating his own statements, the amount, time and place, and business purpose for each expenditure …. Substantiation by 'adequate records' generally requires the taxpayer to 'maintain an account book, diary, log, statement of expense, trip sheets or similar record' prepared contemporaneously with the use of the vehicle, as well as evidence documenting the expenditures.'"
In support of his claimed deductions, Eze submitted annotated calendars for the first seven months of 2015 and all of 2016. The annotations show the locations that he allegedly visited in connection with either his consulting or his contracting business. The Tax Court upheld the IRS's disallowance of the deductions, finding the evidence not to be credible.
None of the calendar entries was made contemporaneously with the alleged travel, according to the court. The entries were created solely for use during the IRS examination.
"He offered no clear explanation as to when he made these entries, and he could not explain how he could have remembered these granular details many months or years after the fact," the court said.
Eze supplied no evidence linking the locations shown on the calendars to the addresses of his consulting clients, according to the court. "He did not identify a single client who resided or worked at any particular address. Thus, he supplied no evidence that, if he actually made trips to these locations, the journeys were business trips."
Moreover, the odometer readings he submitted lacked reliability on their face, according to the court. For example, virtually every event, for more than 100 entries, is described simply as "client meeting." In addition, there were inconsistencies in the recording of distances from his home in Maryland to locations in New York.
"None of the calendar entries were contemporaneous, there was no evidence linking the locations shown on the calendar to the addresses of his clients, and the entries on their face seemed questionable," observed Weltman.
