Background. A taxpayer (“Fred”) claimed a deduction for automobile mileage expenses of $7,500 on his federal tax return. The IRS disallowed any deduction due to a lack of substantiation. The Tax Court agreed. It noted that the tax code “imposes strict substantiation requirements” for deducting expenses relating to the business use of a car, and “no deduction is allowable on the basis of any approximation or the taxpayer’s unsupported testimony.” The court noted that substantiation of the business use of a car requires “adequate records, or sufficient evidence corroborating the taxpayer’s own statement, showing the amount of the expense, the time and place of the use of the listed property, and the business purpose.”
Fred had claimed a mileage expense deduction by multiplying the standard mileage rate times miles he claimed that he drove for business purposes. The court pointed out that use of the standard mileage rates “serves only to substantiate the amount of expenses and not the remaining elements of time and business purpose.” It noted that Fred relied on a computer printout “mileage log” with daily listings of business trips identified only by abbreviations under a column entitled “client.” Fred insisted that all of the business miles listed on the mileage log were “related” to his employment. However, the court concluded that “nowhere does the record reveal the … the business purpose of each trip recorded on the mileage log,” and as a result it ruled that Fred was not entitled to any deduction for the business use of his car because of his failure to comply with the substantiation requirements.
Key point. The court also referred to “irregularities” in Fred’s mileage log. For example, “for those dates for which personal mileage is recorded, the mileage log invariably lists either 4, 5, or (more typically) 6 miles of personal travel for the day, for a total of 796 personal miles, compared with 25,096 total business miles recorded. Consulting our own experience, it seems improbable that Fred’s daily personal use of his vehicle would be so rigidly fixed and limited, especially in light of the much larger number of business miles he recorded.”
Relevance to church treasurers. This case is important because it illustrates the strict substantiation requirements that apply to the business use of a car. It is important for church treasurers to be familiar with these requirements, especially if the church has adopted an accountable business expense reimbursement arrangement. Under such an arrangement, the church reimburses employee business expenses that are properly substantiated. The reimbursements are not reported by the church as taxable income to the employee, and the employee claims no deduction on his or her tax return. The employee is reporting to the church, rather than to the IRS. However, churches that adopt an accountable plan must recognize that the substantiation required to support the reimbursement of a business expense is identical to the substantiation that would be required to support a deduction on an employee’s federal tax return. If there is inadequate substantiation for a particular business expense, then the church does not reimburse it. Or, if it does, then this reimbursement is nonaccountable and must be reported as taxable income on the employee’s W-2 and Form 941.
In summary, a church’s tax reporting responsibilities are much different when employees fail to adequately substantiate business expenses under an accountable reimbursement arrangement, and it is the church treasurer’s responsibility to be sure that no expense reimbursement is treated as accountable for tax reporting purposes without adequate substantiation. Tamms v. Commissioner, T.C. Memo. 2001-201.
Need more help? The substantiation of business expenses is explained fully in chapter 7 of Richard Hammar’s annual Church and Clergy Tax Guide, which is available from the publisher of this newsletter by calling 1-800-222-1840. You can also order it from our online bookstore, at www.iclonline.com.
This content originally appeared in Church Treasurer Alert, September 2001.