Many owners or partners of closely held businesses may have a vehicle that is used for both personal and business purposes. Understandably, they may want the business to be able to deduct the business use expenses associated with the vehicle. However, current tax rules set significant restrictions before allowing this deduction.

The rule reads, in part:

"Although a contemporaneous log is not required, corroborative evidence created at or near the time of the expenditure to support a taxpayer's reconstruction of the elements... of the expenditure or use must have a high degree of probative value to elevate such statement to the level of credibility of a contemporaneous record."

In other words, you'll need to prove the actual business use of the vehicle before being allowed any deduction. A recent tax court ruling once again emphasized the need for specific documentation for a business use deduction.

In the recent case (Leon E. Daniels and Margaret I. Daniels, Petitioners, v. Commissioner of Internal Revenue) the taxpayers lost the entire deduction because they could not provide acceptable, credible documentation. Despite the language in the rule that a contemporaneous log is not required, the tax court ruling demonstrates that keeping such a log can go a long way toward proof of business use.

It is important to recognize that an estimate of the expense based on the "Cohen Rule," which was named after the late George M. Cohen, is not allowed for business use of vehicles. Actual documentation must be provided.

If you have any questions regarding the deduction of the business use portion of a vehicle, please contact us.