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Special Substantiation Rules Began in 1986

For 1985 the substantiation requirements of Code Section 274(d) only applied to travel while away from home, entertainment, recreation or amusement expenses, and gifts. They did not apply to local travel expenses, computers used for business purposes, and other listed property known as Section 280F property. Instead, tax deductions and credits for local travel and Section 280F property were subject to the general substantiation requirements applicable to all other business expenditures.

However, beginning in 1986, Section 280F property now falls within the Section 274(d) substantiation requirements, except for minimal personal use of business vehicles which still must be justified under Code Section 162 relating to business expenses or Code Section 212 relating to income producing expenses.

The Committee Report states "the conferees intend that the principles of these regulations fully apply to deductions and credits claimed for local travel and the use of other listed property under Section 274(d)," but that "these principles will need to be carefully applied." This is because expenses for local travel or the use of computers commonly do not involve receipts, and may occur more frequently than expenses for overnight travel.

The IRS has issued regulations specifying how such recordkeeping is to be required, and what documentation is required for local travel (these regulations were issued on November 1, 1985). Taxpayers are not required to maintain trip-by-trip logs and records encompassing each element of the substantiation standards of Section 274(d) to justify a deduction or credit. Instead, taxpayers may substantiate their automobile business use with a journal in which each element of business use during the week is recorded at the end of the week. Also, if the business use follows a consistent pattern, detailed records are not necessary. Instead, you can maintain adequate records for portions of the taxable year that are representative of the business for the entire year and employ those percentages extrapolated for the whole year.

Congress wants to ensure that you only claim those deductions and credits to which you are entitled without being unduly burdened by unnecessarily complex recordkeeping requirements. Yet Congress also believes that you should provide SUFFICIENT information on your tax return so that the IRS can make a preliminary evaluation of the "appropriateness" of your deductions or credits claimed for the business use of an automobile. Previously, this was difficult to do unless you were audited.

Congress has now directed the IRS to obtain certain information from you directly from your tax return. Starting with the 1985 tax year, on returns due April 15, 1986, the IRS began asking you to provide this information about your use of a business automobile:

• Total mileage driven during the year, divided into separate categories for business, commuting, and personal use.
• The percentages of business use and personal use.
• Whether you had the personal use of other vehicles.
• Whether you were able to use the vehicle during after-work hours.
• Whether you have adequate records or sufficient evidence to support the business use claimed on the return.

In the case of other Section 280F property subject to Section 274(d) rules, such as yachts, computers, and airplanes, the IRS will ask you the percentage of business use, and whether you have evidence to support the business use. For computers, the IRS is not required to ask you what the percentage of the year your computer was located at you home, as was originally planned by the House version.

Next Section: Exhibit 1-X Substantiating Business Related Expenses

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© 1986, 1998 to 2002, Jack Warren Wade, Jr.