The WORLD, November/December 2009by Bonnie Lee
Mark It Down
Unless you’re Donna, here’s what you should do: First off, even a reconstructed log needs a starting point. It’s very simple. Write your beginning odometer reading in your appointment book on Jan. 1, and in bright red, mark “Odometer:” on the Dec. 31, page so you remember to record the ending reading at year’s end. Now subtract one number from the other to find out your total mileage. It looks so much more believable and accurate to see 14,823 on the tax return under total mileage than it does to see 15,000, which is a dead giveaway that the student hasn’t done her homework.
In addition to actual mileage traveling to pet-sitting assignments, try as much as possible to note all business meetings, errands and other business vehicle travel in your appointment book. In fact, if you can do it, track both business and personal miles for a two-week period every quarter. Keep the info in your tax file for use at year-end to determine the ratio of business versus personal use.
Provide the total mileage figure and business mileage to your tax pro.
You DO Have Personal Miles
Some people think they can get away with writing off 100 percent of their only vehicle for business. All they are doing is tempting fate. Trish is one of those. Remember her from earlier in this article? She’s such a bad girl; she keeps no records. Here’s the rest of our conversation:
Me: OK, Trish. So how much of the mileage would you say is personal?
Trish: Oh, I don’t have any personal mileage at all.
Me: But Trish, you don’t have another vehicle.
Trish: Oh, I know. But all my miles are all for my pet-sitting business.
Me: [Heavy sigh. We go through this every year.] But Trish, you certainly must go to the grocery store or drop the kids off for school activities.
Trish: I do grocery shopping on the way home from my last pet-sitting appointment. And my kids? They help out with all of my paperwork.
Me: (Eye roll) Right. What about weekends? Don’t you go to the movies? Or yoga class? Or something?
Trish: I’m a pet sitter – I work all weekend long!
Me: OK, Trish, whatever. Fine.
Trish thinks I’m going to give her 100 percent. But she’s wrong. I know the mileage on that SUV is not 100 percent business use. So I knock off some points when she isn’t looking and figure we’re pretty square with the IRS.
Down to Business
So what is business mileage? First of all, you cannot deduct commuting. If you have an office, forget about driving from home to your office location or from home to your first client and counting that as business mileage. An exception is if you are self-employed and have a qualified home office. I know that includes a lot of professional pet sitters. Your commute would be defined as travel down the hall or through the yard to the space that serves as your office. Once you are in the office, then every destination to which you travel to carry on business is considered business mileage.
See the logic? After all, if you have a regular job, you never deduct your commuting mileage against your W-2 wages. Once you get to work, if your boss requires that you use your vehicle for business travel, any mileage for which you are not reimbursed is deductible.
You may also deduct travel between jobs. As you travel from one client’s home to the next, you can deduct the mileage for travel from job No. 1 to job No. 2. Just don’t stop at home for non-business purposes first. That will blow the deduction out of the water.
I often walk from my home office to the post office and sometimes to nearby client offices. On one such walk, I wondered how audacious it would be to write off my shoes. Maybe I’d have to keep pedometer readings in my appointment book to substantiate business use. Hey, why not? I bet, however, that my Manolo Blahniks wouldn’t be considered an ordinary and necessary business expense. The IRS would likely reduce that write-off to what one would spend for a pair of hiking boots, if they allowed the deduction at all. I can hear the auditor now: “You of all people should know better.” Pet sitters and dog walkers probably go through several pairs of shoes in the course of a year – but that’s a subject for another article.
Mark It Down – Second Verse
If your vehicle is used 100 percent for business—say it’s a pet taxi or you have a second vehicle devoted entirely to your pet-sitting business and there’s no personal use—you must still keep a mileage log.
To determine the business-use percentage for a mixed-use vehicle, divide the business miles by the total miles driven, for example, 7,000 (business miles)/10,000 (total miles) = .70, or 70 percent.
Now that we’ve established the percentage of business use and the total miles and business miles driven, let’s put them to use. You need to determine if you are going to use the IRS standard mileage rate or actual costs.
As a professional pet sitter, you cannot use the standard mileage rate if your business provides cars for hire (such as a pet taxi or shopping for pet supplies for your clients) or you have a business that has five or more vehicles being operated at the same time.
If you wish to claim actual expenses, you can deduct gasoline, repairs and maintenance (don’t forget car washes), vehicle registration fees, insurance, tires, car loan interest, lease payments, garage rent, parking, tolls and of course, depreciation, including the Section 179 deduction. Don’t forget to deduct the cost of those scented Christmas trees you hang from the rearview mirror.
Fill in the proper boxes on Form 2106 or on page 2 of Schedule C to take the deduction. If you are depreciating your vehicle, include Form 4562, Depreciation. Make sure you keep all documentation concerning this deduction in your tax file in case of audit.
Audited? Oh No!
And if you are audited and don’t have your paperwork together, don’t panic. Let me show you how understanding the folks at the IRS can be. A couple of years ago a new client, Spencer, came to see me. The IRS was in the middle of auditing three years of tax returns and was considering throwing Spencer in jail for tax fraud. And believe me, the IRS had a case; the tax returns Spencer filed were as phony as Monopoly money. In preparation for the audit, my firm compiled his books and created proper tax returns and a stay-out-of-jail card.
The auditor disallowed the vehicle deduction because Spencer hadn’t maintained a mileage log. I got to work and reconstructed a mileage log based on Spencer’s job files and a little help from MapQuest. The results proved his vehicle expense actually exceeded the amount he had claimed. He had likely paid cash for many of his gasoline purchases but had no receipts. I was excited!
But the auditor would not acquiesce. She had the right to deny the deduction because he did not keep a contemporaneous record. I argued that most auditors understand and accept reconstructed records, even reasonable estimates. “Oh c’mon,” I said, “He’s a pet sitter. He’s got his appointment book of client visits. I mean, duh, he’s got vehicle expense. You should allow something. It’s only fair.”
Finally, the reason for her stubbornness was revealed. The auditor uses her own vehicle and is forced to keep a mileage log so the IRS will reimburse her. And by golly, if she has to keep a log, then everybody else has to. Well, I finally wore her down and she accepted the reconstructed log and 100 percent of the deduction.
Mark It Down – Third Verse
I know I have just relieved your mind. However, I’m not going to let you rest easy. Even though my clients and I have had good experiences dealing with the IRS when it comes to vehicle expense, bear in mind that the IRS does not have to accept reconstructed logs. And in our current political climate, when more tax revenues are required to pay for ever increasing government spending, economic bailouts, wars and such, the IRS may decide to become stricter. You may find yourself walking out of an audit with a big tax bill because you didn’t keep a mileage log.
So go clean your room, quit hitting your sister, and at least mark your annual beginning and ending odometer readings in your appointment book.
(This article has been excerpted and revised from Taxpertise: The Complete Book of Dirty Little Secrets and Tax Deductions for Small Business the IRS Doesn’t Want You To Know, by Bonnie Lee, available from Entrepreneurpress.com.)
Bonnie Lee is an Enrolled Agent (E.A.) admitted to practice at all levels within the IRS representing tax payers in all 50 states. She founded Symmetry Business Services to represent taxpayers in audits, offers in compromise, tax problem resolution and to help non-filers safely reenter the system. She has served as a champion to taxpayers for more than 25 years.
© Copyright 2010 by Pet Sitters International. All rights reserved. For reprint permission for this article, contact EllenPrice@petsit.com.
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