I’ve seen two circumstances where tax deducting vehicle expenses raises your risk of IRS-victimhood:
- Too large of a vehicle deduction. What is an outsized bell ringer? To get to the answer, look at how the IRS picks most of its audits. The IRS uses a computer analysis that produces a “DIF” score. In essence, the DIF program compares your deductions, by category, with other taxpayers in similar occupations or businesses. If your numbers are significantly beyond the norm, your audit score increases.
For example, the IRS says that the average vehicle expense deduction is about 14% of all deductions taken by sole proprietors – the tax reporting category most small business owners choose. These solos report their business income and expenses on Schedule C of their tax returns.
So, let’s say Bruce Wayne’s business vehicle (the Batmobile, of course) tax deductions are not 14%, but 48% of his total vigilante law enforcement business expenses. While this doesn’t guarantee that Bruce will be audited, it dramatically raises his odds.
- An overall business loss taken on a tax return. Losses of any kind claimed on a tax return will raise the DIF score. One reason, according to the IRS, is that some folks try to call (and deduct) a pleasurable activity as a business. Any activity that does not appear to have a bonafide “profit motive” is suspect The tax code terms this a “hobby” loss and prohibits it. Folks have tried to deduct such things as yacht racing as a business, which the IRS has found hilarious. Vehicle expenses by themselves may not cause an audit but they can contribute to an overall loss. As such, the expense will be scrutinized by an auditor. This is not to say that you should not claim a legitimate loss for your venture, just be ready to show a profit motive at an audit.
For more information, see my book, Stand Up to the IRS (Nolo) at Amazon.com, and visit my website, taxattorneydaily.com.
Frederick W. Daily, J.D, LL. M (tax)
April 26, 2016
Please note: The information contained in this article is for informational purposes only and does not constitute legal, tax, or accounting advice. If you have any specific questions you should consult with a legal, tax, or accounting professional.