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If a fire is worth fighting, it's worth fighting in style. But the firefighter still can't deduct the Benz.

Iabiz20130218Deductions for personally-owned vehicles are hard to get. A San Francisco firefighter learned that the hard way in Tax Court this month.

Mr. & Mrs. McCormack had a Schedule C home renovation business. They decided it needed a vehicle. So naturally they deducted it. From the Tax Court opinion:

The business was named Northside Construction and was identified as such on Schedule C. During 2009 Northside Construction had two jobs that generated $5,360 of gross receipts. The $41,818 loss deducted for the business was based primarily on $33,600 of depreciation and section 179 expense taken for the purchase of a 2007 MB 450 GL automobile that was acquired on October 5, 2009.

"MB" stands for "Mercedes Benz."

The IRS poked around, and found the car wasn't just used in the Schedule C business. The taxpayers then stumbled over the obstacle that disallows so many auto deductions: poor recordkeeping.

Petitioners claim that the car was used 100% of the time for business use in Northside Construction and for transportation by Mrs. McCormack for her San Francisco Fire Department responsibilities. Mr. McCormack kept a log for his business use of a Silverado truck on behalf of Ranger Pipelines, Inc., but did not keep the log in the automobile. Mrs. McCormack did not keep a log

If you don't keep an automobile log, you have at least two strikes on you if you try to deduct auto costs. The IRS had no trouble getting strike three across. Mrs. McCormack was an employee of the San Francisco Fire Department. Sec. 179 allows taxpayers to elect to deduct costs of assets that would otherwise be capitalized and recovered through depreciation. You can't take Sec. 179 for use of a car as an employee "unless such use is for the convenience of the employer and required as a condition of employment."

On top of that, you have to use a vehicle more than 50% in a qualifying business to take a Sec. 179 deduction. So things went badly:

There is no evidence in the record that the city of San Francisco required its fire department personnel to use their own automobiles while employed for the city, nor is there any evidence to suggest that the city failed to supply vehicles to its employees to provide fire department services for its citizens. On the contrary, Mrs. McCormack testified that during 2009 she used fire engines and ambulances provided by the city and did not otherwise keep a record of mileage for the automobile use as an employee. Consequently, Mrs. McCormack's use of the automobile as an employee of the city of San Francisco is not treated as business use for purposes of the Internal Revenue Code. When Mrs. McCormick's use of the automobile as an employee is coupled with the admitted personal use of the automobile for family and household purposes and the limited business use by Mr. McCormack, the Court holds that the business use of the automobile was less than 50%...

Petitioners may not deduct section 179 expenses for the MB 450 GL automobile purchased October 5, 2009. Furthermore, because of the failure to substantiate business use by means of a log or otherwise, no depreciation on the automobile, a listed property, may be claimed.

What can we learn from this tax conflagration?  Several things:

  • If you want to deduct business use of a car, you need to keep a log as you go.  Telling your tax preparer "Oh, 30,000 miles, 100% business" doesn't work well if you are audited.
  • If you do use your car as an employee, it's much better to turn in your mileage and get reimbursed than to try to get it as a tax return deduction. Employee business expenses are only deductible when they exceed 2% of your adjusted gross income -- and not deductible at all for alternative minimum tax.
  • If you deduct a car on your Schedule C, you can count on the IRS taking a close look at it on examination. If it's a luxury car, more so.

Cite: McCormack, T.C. Summ. Op. 2013-9.

Follow-up on January 4 post. Governor Branstad has signed into law a bill adopting most of the January "Fiscal Cliff" legislation for 2012 Iowa tax returns. As expected, the bill conforms most of the retroactive provisions of the Fiscal Cliff tax bill, including expanded Section 179 deductions, but not the expansion of "Bonus Depreciation."  More here.

Image Credit: Wikimedia Commons.

-Joe Kristan

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