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Here’s what the IRS has to say about the Child Tax Credit. As with every tax code it is not cut and dried!

The Child Tax Credit is a tax credit that may save taxpayers up to $1,000 for each eligible qualifying child. Taxpayers should make sure they qualify before they claim it. Here are five facts from the IRS on the Child Tax Credit:

1. Qualifications. For the Child Tax Credit, a qualifying child must pass several tests:

• Age. The child must have been under age 17 on Dec. 31, 2016.
• Relationship. The child must be the taxpayer’s son, daughter, stepchild, foster child, brother, sister, stepbrother, stepsister, half-brother or half-sister. The child may be a descendant of any of these individuals. A qualifying child could also include grandchildren, nieces or nephews. Taxpayers would always treat an adopted child as their own child. An adopted child includes a child lawfully placed with them for legal adoption.
• Support. The child must have not provided more than half of their own support for the year.
• Dependent. The child must be a dependent that a taxpayer claims on their federal tax return.
• Joint return. The child cannot file a joint return for the year, unless the only reason they are filing is to claim a refund.
• Citizenship. The child must be a U.S. citizen, a U.S. national or a U.S. resident alien.
• Residence. In most cases, the child must have lived with the taxpayer for more than half of 2016.

2. Limitations. The Child Tax Credit is subject to income limitations. The limits may reduce or eliminate a taxpayer’s credit depending on their filing status and income.

3. Additional Child Tax Credit. If a taxpayer qualifies and gets less than the full Child Tax Credit, they could receive a refund, even if they owe no tax, with the Additional Child Tax Credit.
Because of a new tax-law change, the IRS cannot issue refunds before Feb. 15 for tax returns that claim the Earned Income Tax Credit (EITC) or the ACTC. This applies to the entire refund, even the portion not associated with these credits. The IRS will begin to release EITC/ACTC refunds starting Feb. 15. However, the IRS expects these refunds to be available in bank accounts or debit cards at the earliest, during the week of Feb. 27. This will happen as long as there are no processing issues with the tax return and the taxpayer chose direct deposit. Read more about refund timing for early EITC/ACTC filers.

4. Schedule 8812. If a taxpayer qualifies to claim the Child Tax Credit, they need to check to see if they must complete and attach Schedule 8812, Child Tax Credit, with their tax return. Taxpayers can visit IRS.gov to view, download or print IRS tax forms anytime.

5. IRS E-file. The easiest way to claim the Child Tax Credit is with IRS E-file. This system is safe, accurate and easy to use. Taxpayers can also use IRS Free File to prepare and e-file their taxes for free. Go to IRS.gov/filing to learn more.

All taxpayers should keep a copy of their tax return. Beginning in 2017, taxpayers using a software product for the first time may need their Adjusted Gross Income (AGI) amount from their prior-year tax return to verify their identity. Taxpayers can learn more about how to verify their identity and electronically sign tax returns at Validating Your Electronically Filed Tax Return.
Additional IRS Resources:
• Publication 972, Child Tax Credit
• Instructions for Form 8812
• Interactive Tax Assistant Tool
• IRS Tax Map

As a rental property owner, you are entitled to write off “ordinary and necessary expenses for managing, conserving, or maintaining rental property from the time you make it available for rent.”

The IRS has no definitive list of deductions. As a landlord, you should visit the IRS website and take a good look at Schedule E. This is where you will report the income and expenses for your rental property. Almost every deduction, certainly the obvious ones are listed: advertising, auto and travel, cleaning and maintenance, commissions, insurance, legal and professional fees, management fees, mortgage interest, other interest, repairs, supplies, taxes, utilities, and depreciation. Beyond that are five lines for “Other Expenses,” which might include bank charges, telephone, security, equipment rental, homeowner association dues, gardening, eviction expenses, among others. Think in terms of whether or not you would have spent the money if you didn’t have the rental property. If it’s an ordinary and necessary expense, it is deductible.

Timing is everything. You can deduct your expenses as soon as the property becomes available for rent. If you own a rental property that is sitting idle and you are not looking for tenants then your expenses with the exception of depreciation, are not deductible. Perhaps you are performing a major remodel or you don’t need the money and just don’t want to deal with tenants right now or you are using the property personally then you cannot take deductions for your expenses. But if the property is available and you are attempting to secure a tenant, you may. Keep a file of your advertising and other efforts incurred to secure a tenant in the event of audit as you may be required to prove intent.

If the property is vacant and listed for sale, you may deduct the expenses until it is sold.

Here are some special rules, tips, and background on certain deductions you may consider:

1. Travel expenses: if the primary purpose of a trip is to collect rental income or to manage, conserve, or maintain your rental property, the expense is deductible. For example, if you own a condo in Hawaii and drive by to make sure it’s still there while you’re on vacation, you don’t have a bona fide deduction. Obviously, vacation was your primary purpose. But if your primary reason for traveling there is to collect back rent or paint the exterior or figure out why the roof keeps leaking, you are entitled to the deduction. Keep in mind though, that if you are visiting the property to make major capital improvements, like remodeling the bathroom and kitchen, the expense is not currently deductible. You must add the cost of the trip to the cost of the improvements and depreciate it. Make sure to keep all documentation to prove intent.

Local travel is also deductible. If you own a property 45 minutes from your home and you visit it once a month to pick up the rent and make sure the tenant hasn’t burned the place down, you should track your mileage and take a deduction.

2. Taxes: Property tax is the obvious expense listed here. However, if local ordinance requires that a landlord pay for a business license, you may deduct this expense. However, you cannot deduct charges for taxes or assessments that increase the value of your property, such as charges for putting in streets, sidewalks or water and sewer systems. You also cannot depreciate these expenditures. But they don’t disappear. You add the cost to the basis of the property. They are essentially deducted when you sell the property.

3. Points: Points, aka loan origination fees, are basically considered prepaid interest and as such are amortized over the life of the loan. You cannot write off the deduction all at one time. Take a copy of the settlement paper to your tax pro when preparing the tax return. Other deductions may be listed on that statement that may be currently deducted.

4. Repairs versus improvements: While repairs are currently deductible, improvements must be depreciated over their useful life. A repair keeps your property in good working condition. Things like unstopping a toilet, fixing rain gutters, replastering the hole in the wall left by the last tenant’s fist when you raised his rent, replacing a broken window are all examples of repairs. Improvements add value to the property and include things like remodeling the kitchen or adding a swimming pool. In 2014, new incredibly complex regulations were passed changing the parameters covering the topic of repairs versus improvements. They were so complex that the IRS disbanded with enforcement for 2014. Be sure to contact your tax pro to determine the deductible status of any repairs and improvements you perform on your property this year.

5. Tax Return Preparation Fees: A portion of the total fee you pay for tax return preparation can be allocated and deducted on Schedule E for preparation of Schedule E. Deduct tax planning/projection fees relating specifically to the rental property and any fee paid to resolve a tax underpayment issue related to your rental property on Schedule E. The full tax preparation fee is deductible on Schedule A, so why bother allocating to schedule E? Bear in mind that on Schedule A you do not benefit from the entire deduction. It is listed as a Miscellaneous itemized deduction and is reduced by 2% of your adjusted gross income.

Publication 527 is available at www.irs.gov and will provide you with complete information on the deductibility and treatment of your rental expenses.

I have encountered so many misconceptions about what is deductible when you purchase, own, and operate a rental property or a personal residence for that matter. Here’s the list of misconceptions and the correct answers:

  1. Misconception: You are allowed to write off the down payment. Wrong! This expense is part of the basis of the property and is not deductible on your tax return. You still get the write off, albeit indirectly, via depreciation. Here’s how that works: you buy a property for $100,000. You put down $20,000 and pay $5,000 in closing costs. Your basis in the property is $105,000. After deducting the value of the land, you write off the remainder over 27.5 years for residential property and 39 years for commercial property. Depreciation applies only if the property is a rental activity; you cannot depreciate your personal residence. You are allowed, however, to depreciate the portion of the home used as a home office in an active trade or business.
  2. Misconception:Closing costs are deductible. No they are not. They are added to the basis of the property and are deducted via depreciation over the useful life of the property as described above. But take a close look at the closing costs. There may be some expenses listed there that you paid for, e.g. insurance, points, and property taxes which may be currently deductible. Always give closing papers to your tax pro, whether it’s for a purchase, refinance, or sale of a rental property or your own personal residence. Insurance is not deductible for a personal residence but it is an valid write-off for a rental or home office.
  3. Misconception: Points are always currently deductible. Points are only deductible in the year of purchase of a personal residence. For a rental property, points may be deducted ratably over the life of the loan. If you refinance your personal residence and pay points, you may amortize those over the life of the loan as well. It’s taken as a deduction on Schedule A under mortgage interest.
  4. Misconception: When you sell a property, your mortgage balance is deducted from the selling price to determine your taxable gain or loss. No, no, no! Your mortgage balance is not a factor in the equation. The IRS couldn’t care less if you financed or paid cash for a property. The basic formula is: selling price less selling costs and the basis in the property. If you sold the $105,000 rental property purchased in #1 for $205,000 and paid out $19,000 in closing costs and sales commissions plus $1,000 for a roof repair, your taxable gain would be $80,000. $205,000 – $105,000 – ($19,000+$1,000) = $80,000. You may also have depreciation recapture which will be included as income on your tax return. Check with your tax pro.
  5. Misconception: Income received from rentals owned in foreign countries is not taxable. Check with Charles Rangel (D-Harlem) on this one. He was confused about the taxability of rents received on his villa in the Dominican Republic. Why was he confused? “Because,” he says, “I don’t speak Spanish.” Hah! This was one of the reasons he was censured by Congress. Don’t get yourself censured. It’s taxable income, okay?

 

 

I trust everyone had a safe and fun 4th of July weekend! I went to the plaza here in downtown Sonoma and enjoyed the parade. Talk about a Norman Rockwell setting and slice of life. Well, when my husband and I were setting up our chairs, who happened to be right next to me but a good business associate. Not a client but a networking buddy. We chatted, ran over to Steiner’s and had a bloody Mary together. Hung out at the BBQ in the plaza afterwards. Never did talk business but we cemented our relationship a little more. He’ll remember me when it’s time to refer clients.

So what do you think? Can I write off that Bloody Mary? Can I write off the hot dog and potato salad? Is this a deductible business entertainment expense?

Well, I hate to burst your bubble, but a smug IRS agent quizzing you about this scenario would joyfully proclaim, “Disallowed!”  There are rules. And essentially, the rules say, “If you’re having way too much fun, it’s not a deductible expense.” But let me quit mincing words here and give you the real lowdown.

Rule #1 – First of all, any entertaining you provide must be directly related to the active conduct of your business or associated with a directly related discussion that preceded or followed the meal or entertainment. This means that hanging out with a business associate or even a client simply to promote goodwill is not deductible nor is giving a party for the sake of establishing goodwill. In order to deduct the cost of entertainment, you must conduct business before, during, or after the event. So we’re talking product demonstration, reveal of a new product or service, or a sales pitch. And the environment must be conducive to conducting business. The IRS believes it is impossible to convince a table-dancing drunk with a lampshade on his head to try your new and improved product.

The IRS once disallowed the write-off of tickets to a baseball game because the loud atmosphere at a ball part does not allow for a comprehensive business discussion.

And giving a sales pitch at the end of a party is much like talking politics with sugar infused 5-year-olds. As a write-off, it’s not going to fly.

Rule #2 – The guest list determines the extent to which you can write off an event. Given you are following Rule #1, you have a 100% write off if:

  1. The party is open to the general public, or
  2.  The party is for employees and their spouses.

You follow the 50% limitation rules that apply in general to meals and entertainment and write off half the cost if:

  1. The party is for customers and prospective customers and/or
  2. Independent contractors associated with your firm (they cannot be classified as employees for this purpose).

There is no write off for attendance by family members even if they are employees or owners. The expense is considered personal and no deduction is allowed. If there is a mix of employees customers and family members, allocate the expense and deduct accordingly. For example, if 10 employees and 30 customers attend, and the party costs $400, you may deduct 100% of 25% of the cost (employees) and 50% of the remaining cost (customers). And you thought there’d be no math. Sorry about that. Your deduction works out to $100 (cost allocated to employees) + $150 (cost allocated to customers) for a total write off of $250.

Rule#3 The entertainment may not be “lavish or extravagant.” That’s another one of those subjective, gray areas that can be argued to death with an auditor, his manager, all the way up to tax court. But why go there? Keep it simple. If your company grosses $100k a year, you likely shouldn’t be helicoptering in your guests. You get the picture.

It’s fine that you follow the rules, but proving you did is another matter. You want to have documentation to prove your case in the event of audit. Here are some tips:

  1. Make sure the invitation announces a business purpose. Such as “Brunch on us! Test drive our new cholesterol-free egg beater omelets.”
  2. Keep a guest list. Have attendees sign a guest book or track RSVPs so you can prove an accurate allocation of the expense.
  3. Take pictures of guests looking at your new products or a video clip of your product demonstration; anything that proves the business purpose.
  4. Keep all receipts for all expenses incurred.
  5. Maintain all of the above documentation in your tax file.

And a final tip: When providing the expenses to your bookkeeper, separate the cost of the party that is 100% deductible to a different category from “Meals and Entertainment.” Track it under “Promotion” or “100% Entertainment” to ensure the full write-off at tax time. Otherwise, your accountant will likely apply the 50% rule to everything under “meals and entertainment” and you will have lost a valuable write-off.

Okay, ready now? Cool. Let’s party!

Bob, a longtime client, showed up at my office during tax season bringing all his receipts and organizer. “You don’t have much in the way of medical expense,” I told him as I perused his itemized deduction worksheet.

“Nah, just some co-pays.”

I looked up from his organizer, surprised he hadn’t said, “WHAT?” After all, Bob is deaf as a stone and has been for years. That’s when I noticed a hearing aid in each ear. “You just get those?” I asked.

“I got them last year.”

“Did Medicare cover them?”

“Nope, I paid for them out of my own pocket. I got top of the line too. These suckers cost me seven grand.”

“And you got them in 2014 – last year – right?” He nodded. “You didn’t list the expense in your organizer, Bob. What’s the matter? You don’t want to write them off?”

His jaw dropped. “I can write them off?”

“Yeah, it’s a valid deductible medical expense. Good thing I noticed because I just saved you $2500 in taxes. How about that Bob?”

And Bob’s not the only one who doesn’t realize what is and what isn’t allowable when it comes to medical expenses. Lots of folks have misconceptions about what can be deducted.

First of all, one must be able to itemize deductions in order to take the medical expense deduction. The IRS grants us an option of the standard deduction – generally taken by renters and lower income individuals or itemized deductions – generally available to homeowners and higher income individuals.  Either the standard deduction or the total of itemized deductions (reported on Schedule A) is subtracted from your income. Income tax liability is calculated on the remainder. So the more itemized deductions you can list, the more you will save in taxes.

Know this; you generally have to have an awful lot of medical expenses in order to take these expenses as an itemized deduction. You don’t just list your medical then deduct it. After totaling your medical expenses, the IRS requires that you subtract 10% (7.5% if you are 65 or older) of your adjusted gross income from the total of your medical expenses. You then write off the remainder.  So if you made $100,000 last year, you can write off the amount above $10,000 ($7,500 if 65 or older) in medical expenses. If you’re healthy, you might not have enough medical bills to enjoy the write-off. But don’t quit reading yet. You can deduct more than just doctor visits.

A complete list of deductible medical expenses is available in Publication 502. Most people track medical insurance, doctor visits, prescriptions, eye and dental care. You may be surprised to find the following are deductible medical expenses:

  1.  Capital improvements to your home or vehicle to accommodate a disability
  2. Transportation and lodging in another city if the primary purpose is medical care
  3. Medicare premiums deducted from your Social Security check
  4. Chiropractor, acupuncture, therapeutic massage, psychologist, psychiatrist, marriage counselor, naturopath
  5. Alcohol and drug addiction for inpatient treatment at a therapeutic center, including meals and lodging
  6. Dentures, birth control pills, and pregnancy test kits, fertility enhancement
  7. Cost of buying, training, and maintaining a guide dog or other service animal when required to assist you or your dependent with physical disabilities
  8. Unused sick leave to pay for your health insurance premiums
  9. Cost of medical conferences and transportation to same if the topic concerns the chronic illness of yourself, your spouse or your dependent
  10. Adapters to television sets and telephones for the hearing-impaired.
  11. Braille instruction, Braille books and magazines
  12. Bandages
  13. Health, dental and eye insurance, long term care insurance, HMO fees, disability insurance withheld from your paycheck
  14. Lead-based paint removal in your home
  15. Cost of weight loss clinic if prescribed by a doctor for treatment of obesity or hypertension
  16. Cost of medical care, lodging and meals in a nursing home if there for medical reasons
  17. Medical mileage – trips to see practitioners, pharmacy, etc
  18. Cosmetic surgery for breast reconstruction after a mastectomy for cancer or to correct a birth defect or other condition that interferes with one’s health.

Generally cosmetic surgery is not deductible.  However, a stripper won a court case several years ago and was allowed a deduction for breast enhancement. However, it was not allowed as a medical expense. Instead, she was able to write it off as an “ordinary and necessary” business expense.

Also not deductible are vitamins and supplements, gym membership, dance lessons and swimming lessons even if recommended by your physician, prescriptions for controlled substances (marijuana, laetrile, etc. that violate federal law) or prescription medicines from foreign countries, hair transplants and teeth whitening.

Taxpertise tip of the day: stack your medical expenses into one year. So for example, if you had a surgery this year and also need a root canal and new glasses, don’t wait until January to have that work done. Do it now so you can maximize the tax benefit. You cannot pay for them now and take the deduction unless you actually undergo the treatment or procedure.

If you are self-employed, you likely use your personal car or truck for business as well as pleasure. If so, the business portion of your vehicle expense is deductible.

 

If you work for The Man and use your vehicle on the job and are not reimbursed for your mileage, you have a write off as well.

 

Did you know that you can write off mileage every time you run to the pharmacy to pick up a prescription or visit your eye doctor or embark other trip for medical purposes? And if you do volunteer work for a qualified nonprofit, your unreimbursed volunteer mileage may be deductible.

 

It gets better. If you work two jobs and drive between job #1 and job #2 (without going home first), you can deduct those miles. I have a client who saves about a grand a year in taxes because he writes off the mileage between his two jobs.

 

You’re thinking, “Yeah! This is great!” Sure, it’s great, but it’s not necessarily easy. Naturally, there are rules to follow, forms to complete, data to track. In fact, the IRS regulations state that you should basically attach a clipboard to your steering wheel and keep a mileage log. You need to track every deductible mile you drive. You must report the exact number of total miles you drive every year breaking out commuting mileage, which, by the way is not deductible, personal miles driven, and business miles; like you’re really going to jump on that one. Even if you make it a New Year’s resolution, it’s hard work to keep a complete and accurate mileage log.

 

I’ve been representing taxpayers in audits for more than 20 years and here’s the deal when it comes to that mileage log: The auditor asks for it and I say “Come on, you know nobody, absolutely nobody, keeps one.” (Well I did have a client once who kept one but was he ever audited? No!) So the auditor will argue for a bit saying he can disallow the deduction because no contemporaneous records were kept. I carry on about how it’s unreasonable to expect folks to really do this, and finally the auditor consents to a reconstruction.

 

So if you have an appointment book (always retain your appointment books in your tax file) you can go through it and using Mapquest if necessary, compile the numbers the IRS is looking for.

 

You should keep some basic records that are easy to manage:

 

  1. On January 1 log in your beginning mileage from your odometer into your appointment book.  If you use a PDA, record the mileage on a sheet of paper and place it in your current year tax file.
  2. Put a note on your December 31 calendar to list your ending odometer reading.
    1. Note: If you’re going through an audit and don’t have odometer readings, look for repair receipts near the beginning and end of the year. The odometer reading will be listed there and it’s possible to extrapolate the numbers.
  3. By subtracting your beginning from your ending odometer reading you will have your total mileage figure for the year. The IRS asks for this number on your tax return.
  4. Mark as many business destinations as you can throughout the year in your appointment book. At year end do a rough calculation to determine what your deductible business usage is.
  5. If your business usage is greater than 50% you may qualify to deduct that percentage of your total actual expenses including: gas and oil, tires, repairs, maintenance (car washes, etc.), insurance, loan interest, vehicle registration, and depreciation. Or you may elect to take the standard mileage rate times the total business miles driven. Your tax pro can help you decide which method is best for your particular situation. If you use your vehicle less than 50% for business, you can only take the standard mileage rate.

Due to the advent of PDAs, appointment books are becoming obsolete. If you use an electronic calendar and printout capability is not available, than you will want to log reminders to mark the odometer readings and store that information in your tax files. Quarterly, you should manually track business versus personal usage to establish and substantiate your percent of business usage.

 

It’s unfortunate that we have to spend so much time keeping these sorts of records, but you will be happy you did if the IRS knocks at your door.

Harley the Dawg says: You may be able to write off a service animal, security dog (they scare me), and herding farm dog. Talk to your tax pro to see if you qualifyPicture of a dog  in a party hat

I’ll bet you didn’t know that some of these are deductible!

For more information, read my article for FOXbusiness.com

This article has been excerpted from Taxpertise: The Complete Book of Dirty Little Secrets and Tax Deductions for Small Business the IRS Doesn’t Want You To Know, available from Entrepreneurpress.com.

Dan, a new client, arrived at my office for his tax appointment. He had dutifully filled out the tax organizer I had mailed to him. His penmanship was like a draftsman’s–perfectly aligned, square, and consistent.

I flipped to the first page of data. Dan had copied every figure from every box of his W-2 onto the organizer despite my telling him he needn’t do that. Just give me the W-2; no need to do any copy work. And, like most tax pros, I prefer to work from the document itself. The numbers written onto an organizer could possibly be transposed or illegible. Hey, no problem. Lots of folks like to mark up the organizer; I just hate to see them go to all that extra work.

I flipped a few more pages and found that Dan has a side business as a computer consultant. He has a home office and travels quite a bit to his clients’ places of business. I turned to the home office worksheet, and lo and behold, Dan had actually prorated his mortgage interest, insurance, property taxes, and utilities between personal and business use of the home. Poor guy. Another waste of time since the tax software does that for me automatically.

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When I turned to the section regarding business use of the automobile, my eyes bugged out. You’d think I’d found a black widow squashed onto the page. What I saw was something I had never seen before and have not seen since: A complete six-page mileage log detailing to the tenth of a mile every destination by date for the entire year. Beside it was listed Dan’s actual expenses, including gas, vehicle registration, repairs, insurance, and auto loan interest. He listed his grand total mileage, his commuting mileage, his personal mileage, and his business mileage.

Absolutely amazing.

It is rare for a client to list his automobile expenses because most clients don’t track their costs during the year. Rare for a client to even know his total mileage. But to show every expense plus attach a mileage log with so much detail wasn’t just rare–it was a once-in-a-lifetime event. With any other client, even the most anal retentive of the lot, the page is usually blank. And it’s typically accompanied by this conversation:

Me: So, Bob, did you use the van this past year in your mobile repair business?

Bob: Yep.

Me: So how many miles did you drive, Bob?

Bob [His head rears back and his eyes dart skyward as though the answer were inscribed on the ceiling. In fact, I think it would be great fun to take a marker and write “19,497” right up there above the client chairs.]: Uh, I don’t know. Probably about the same as I did the year before. How many miles did I drive then? Whatever it was, add another thousand.

As if mileage inflation ran side by side with economic inflation. Dan was the client from heaven by comparison. All I could do was stare at the mileage log. Dan shifted in his seat and cleared his throat.

I finally picked up my jaw from the desktop and closed my mouth. Where did I put that box of gold stars? I wanted to offer Dan a job. What else do you do with someone like that? I mean, there would be no lost files, ever. Every client conversation would be documented in great detail. Every figure on a tax return would be backed up by tapes and logic and citations of tax code and photographs and schematics. He would be the perfect employee. I wouldn’t have to spend years carrying on about the importance of documentation. He already got it.

It was either that or ask him what the hell is wrong with him. Find out if he was being treated for obsessive-compulsive disorder and, if so, did he remember to include a deduction for his meds?

I didn’t do either. I simply prepared Dan’s taxes and have enjoyed a smooth and steady business relationship with him ever since.

Naturally, Dan never got audited. So I never had the pleasure of making an IRS agent’s eyes bug out the way mine did.

The funny thing is that what Dan brought me is exactly what the IRS wants. Or so then say. IRS regulations dictate that if you are using a vehicle for business purposes, you must keep a contemporaneous mileage log, which means you’re supposed to mark down your mileage as it occurs. That’s what Dan did. Dan and Dan alone in the entire country, in the entire universe, if in fact they have taxes on other planets.

The IRS can require us to keep logs all it wants. Just like our parents required us to make our beds and be home by ten and not hit our siblings. But let’s get real. Dan is the only guy out there who does this. The rest of us don’t have the time or inclination for this busywork. Like we’re really going to stare at our odometers and mark down “.8” every time we have to run over to the office supply store. As small-business owners, we’re spending our time changing hats and putting out fires. No time for crayons and clipboards. Sorry.

For that reason I will not lecture you about keeping a log. I know you won’t do it. Even if you make it a New Year’s resolution and you’re gung ho, I’d bet you dollars to martinis that by January 15, you’ll be off the wagon.

It’s damn near impossible to keep up that good habit. Well, guess what? IRS agents are reasonable human beings and most of them agree with me—no one’s going to keep a damn log. Every IRS agent I’ve dealt with over the past 25 years, even the most hard-boiled of the lot, the ones who have the look of disdain down pat, the perfected eye roll, the smug eyebrow raise, even they have agreed to allow reconstructed logs.

Unless you’re Dan, here’s what you should do: First off, even a reconstructed log needs a starting point. It’s very simple. Write your beginning odometer reading in your appointment book on January 1, and in bright red, mark “odometer:” on the December 31 page so you remember to record the ending reading at year-end. Now subtract one number from the other to find out your total mileage. It looks so much more believable and accurate to see 14,823 on the tax return under total mileage than it does to see 15,000, which is a dead giveaway that the student hasn’t done her homework.

Try as much as possible to note all business meetings, errands, and other business vehicle travel in your appointment book. In fact, if you can do it, track both business and personal miles for a two-week period every quarter. Keep the info in your tax file for use at year-end to determine the ratio of business versus personal use.

Provide the total mileage figure and business mileage to your tax pro.

Some people think they can get away with writing off 100 percent of their only vehicle for business. All they are doing is tempting fate. Bob is one of those. Remember him from a couple of pages ago? He’s such a bad boy; he keeps no records. Here’s the rest of our conversation:

Me: OK, Bob. So how much of the mileage would you say is personal?

Bob: Oh, I don’t have any personal mileage at all.

Me: But Bob, you don’t have another vehicle.

Bob: Oh I know. But all my miles are all business.

Me [Heavy sigh.] We go through this every year.]: But Bob, you certainly must go to the grocery store or have a girlfriend somewhere.

Bob: I do grocery shopping on the way home. And my girlfriend Susie? She does all the estimates and paperwork.

Me [eye roll]: Right. What about weekends? Don’t you have 49ers season tickets?

Bob: Yep, but that’s a business expense, too.

Me: OK, Bob, whatever. Fine.

Bob thinks I’m going to give him 100 percent. But he’s wrong. I know that old van is not 100 percent business use. So I knock off some points when he isn’t looking and figure we’re pretty square with the IRS.

So what is business mileage? First of all, you cannot deduct commuting. So forget about driving from home to your primary business location or from home to your first client. An exception is if you are self-employed and have a qualified home office. Your commute would be defined as travel down the hall or through the yard to the space that serves as your office. Once you are in the office, then every destination to which you travel to carry on business is considered business mileage.

See the logic? After all, if you have a regular job, you never deduct your commuting mileage against your W-2 wages. Once you get to work, if your boss requires that you use your vehicle for business travel, mileage for which you are not reimbursed is deductible.

You may also deduct travel between jobs. If you have two employers, you can deduct the mileage for travel from job No. 1 to job No. 2. Just don’t stop at home first. That will blow the deduction out of the water.

I often walk from my home office to the post office and sometimes to nearby client offices. On one such walk, I wondered how audacious it would be to write off my shoes. Maybe I’d have to keep pedometer readings in my appointment book to substantiate business use. Hey, why not? I bet, however, that my Manolo Blahniks wouldn’t be considered an ordinary and necessary business expense. The IRS would likely reduce that write-off to what one would spend for a pair of hiking boots, if they allowed the deduction at all. I can hear the auditor now: “You of all people should know better.”

If your vehicle is used 100 percent for business–say it’s a utility truck, a dump truck, a delivery vehicle, or a second vehicle devoted to business–and there’s no personal use, you must still keep a mileage log.

To determine the business-use percentage for a mixed-use vehicle, divide the business miles by the total miles driven, for example, 7,000 (business miles)/10,000 (total miles) = .70, or 70 percent.

Now that we’ve established the percentage of business use and the total miles and business miles driven, let’s put them to use. You need to determine if you are going to use the IRS standard mileage rate or actual costs.

You cannot use the standard mileage rate if:

your business provides cars for hire (limo service, taxi, etc.);

you have a business that has five or more vehicles being operated at the same time;

you are a rural mail carrier who has a qualified reimbursement plan; or

you are using an employer-provided vehicle.

If you wish to claim actual expenses, you can deduct gasoline, repairs, and maintenance (don’t forget car washes), vehicle registration fees, insurance, tires, car loan interest, lease payments, garage rent, parking, tolls, and of course depreciation, including the Section 179 deduction. Don’t forget to deduct the cost of those scented Christmas trees you hang from the rearview mirror.

Fill in the proper boxes on Form 2106 or on page 2 of Schedule C to take the deduction. If you are depreciating your vehicle, include Form 4562, Depreciation. Make sure you keep all documentation concerning this deduction in your tax file in case of audit.

And if you are audited and don’t have your paperwork together, don’t panic. Let me show you how understanding the folks at the IRS can be. A couple of years ago a new client, Spencer, came to see me. The IRS was in the middle of auditing three years of tax returns and was considering throwing Spencer in jail for tax fraud. And believe me it had a case; the tax returns he filed were as phony as Monopoly money. My firm compiled his books and created proper tax returns and a stay-out-of-jail card.

The auditor disallowed the vehicle deduction because Spencer hadn’t maintained a mileage log. I got to work and reconstructed a mileage log based on Spencer’s job files and a little help from Mapquest. The results proved his vehicle expense actually exceeded the amount he had claimed. He had likely paid cash for many of his gasoline purchases but had no receipts. I was excited!

But the auditor would not acquiesce. She had the right to deny the deduction because he did not keep a contemporaneous record. I argued that most auditors understand and accept reconstructed records, even reasonable estimates. “Oh c’mon,” I said, “He’s a contractor. He’s got a truck. I mean, duh, he’s got vehicle expense. You should allow something. It’s only fair.”

Finally, the reason for her stubbornness was revealed. The auditor uses her own vehicle and is forced to keep a mileage log so the IRS will reimburse her. And by golly, if she has to keep a log, then everybody else has to. Well, I finally wore her down and she accepted the reconstructed log and 100 percent of the deduction.

I know I have just relieved your mind. However, I’m not going to let you rest easy. Even though my clients and I have had good experiences dealing with the IRS when it comes to vehicle expense, bear in mind that the IRS does not have to accept reconstructed logs. And in our current political climate, when more tax revenues are required to pay for ever increasing government spending, economic bailouts, wars, and such, the IRS may decide to become stricter. You may find yourself walking out of an audit with a big tax bill because you didn’t keep a mileage log.

So go clean your room, quit hitting your sister, and at least mark your annual beginning and ending odometer readings in your appointment book.

Bonnie Lee is an Enrolled Agent (E.A.) admitted to practice at all levels within the IRS representing tax payers in all 50 states. She founded Symmetry Business Services to represent taxpayers in audits, offers in compromise, tax problem resolution and to help non-filers safely reenter the system. She has served as a champion to taxpayers for more than 25 years. She is the author of Taxpertise: The Complete Book of Dirty Little Secrets and Tax Deductions for Small Business the IRS Doesn’t Want You To Know, available from Entrepreneurpress.com

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