Business Expense Documentation and Auto Usage
Business Expense Documentation
The Internal Revenue Service has been aggressively asserting that business expenses deducted for automobile and other listed property usage and business entertainment must be documented with specific information, not estimates. Records must be maintained to substantiate the amounts deducted on the income tax return.
Types of records that can be used to substantiate these expenses include:
- Log or diary of business mileage and of business entertainment
- Appointment book or calendar of business activity along with independent, third-party documentation of vehicle mileage like repair receipts or inspection slips displaying mileage at the beginning and at the end of the year for each vehicle used for business purposes
- If actual expenses are claimed, receipts, invoices and cancelled checks for automobile expenses including automobile insurance policies for all business vehicles and Bill of Sale or other verification of the cost of the vehicle
- Documentation of business entertainment, including identification of participants, business purpose, dates and amounts
Failure to maintain adequate records could result in adjustment under audit, including additional assessments of tax, interest and penalties.
Personal Auto Usage
The personal use value of a company auto is a taxable fringe benefit treated as noncash compensation paid to the employee (or partner, or shareholder employee). Under the general valuation rule, the employer must determine the actual fair market value (FMV) of the employee's personal use of an employer-provided vehicle. Alternatively, the cents-per-mile method may be used. Please contact your local Yeo & Yeo tax professional to determine which method to use and to assist with calculating the personal auto usage. This noncash compensation is taxable for income taxes as well as social security and Medicare taxes.