Deductible Transportation Costs To Avoid Problems with the IRS, Know the Rules of the Road

When you get in your car and turn the key, have you ever considered the tax purpose of your trip?

Tax law permits deductions for “ordinary and necessary” business expenses. Deductions for personal expenses, other than those specified (interest on a home mortgage, for instance), are disallowed. To determine which transportation costs are deductible, we need to distinguish between business and personal transportation. This article will focus primarily on local transportation costs.

Commuting expenses, or the cost of traveling between the family home and place of business, are personal expenses and, therefore, nondeductible. Commuting has been held to be nondeductible regardless of the distance. In one case, the taxpayer was denied a deduction even though he traveled 300 miles to work.

While the general rule is that commuting costs are nondeductible, there is an exception for transportation to temporary work assignments. Commuting expenses between the taxpayer’s residence and a temporary work location outside the metropolitan area where the taxpayer lives and normally works are deductible.

For example, assume a physician lives in Longmeadow and normally works at Baystate Medical Center. If he or she were assigned to work at Franklin Medical Center for a six-month period of time, the cost of commuting would be deductible. No deduction is allowed under this rule if the taxpayer does not normally work in the metropolitan area where he or she lives. For example, if a physician lived in Longmeadow but worked at Mary Lane Hospital before being assigned to Franklin Medical Center for a six-month period of time, the cost of commuting to Franklin Medical Center would not be deductible.

The metropolitan area includes the area within the city limits and the suburbs that are considered part of that metropolitan area. A work location is temporary if it is realistically expected to last (and in fact lasts) for no more than one year.

Commuting expenses between the taxpayer’s residence and a temporary work location within the metropolitan area are nondeductible unless the taxpayer has one or more regular places of business outside the home and commutes to a temporary work location in the same trade or business. For example, a doctor whose regular work locations are a hospital and a clinic may not deduct the cost of travel between his home and either of those locations.

However, if the doctor made house calls, the costs of traveling to and from those house calls would be deductible — whether he went on those house calls from his home, from the hospital, or from the clinic. If, on the other hand, the doctor had no regular work location and his home office doesn’t meet the principal place of business test, travel from the home to the first house call of the day as well as travel back home from the last house call of the day would be nondeductible commuting. Travel between locations during the day would be deductible. This latter situation is probably rare in the medical profession.

A taxpayer who works at two different places in a day may deduct the expenses of getting from one place to the other. The costs of travel from home to the first location and from the last location back home are nondeductible commuting. For example, assume a physician has two offices, one in Springfield and the other in Somers. Travel from his or her home to either office is nondeductible commuting. If, however, the physician is required to travel from one office to the other, those costs are deductible, assuming adequate substantiation.

Transportation costs incurred while traveling away from home on business are deductible. When is a taxpayer ‘away from home’? For travel purposes, the ‘tax home’ is the principal place of business, not the location of the family residence. For that reason, the courts have denied deductions for living expenses and transportation costs where the principal place of business is located far from the family residence.

For example, a physician lives in Groton, Conn.; the physician has an office in Somers and a second office in Groton. The physician derives approximately 80{06cf2b9696b159f874511d23dbc893eb1ac83014175ed30550cfff22781411e5} of his or her income from the Somers office. The tax home is Somers. The costs of travel from the physician’s home to Somers is nondeductible commuting. If the physician stays overnight at a hotel, he or she is not away from home, and lodging is a nondeductible personal expense. If the physician sees patients in both locations on the same day, the costs of travel between the two locations is deductible, assuming adequate substantiation. Travel to the first location of the day and from the last location of the day are nondeductible commuting.

If a taxpayer’s home office qualifies as the principal place of business, the costs of travel from the home office to a second work location are deductible. Care should be taken in assessing whether a home office qualifies as the principal place of business.

In order to deduct any transportation expenses, the taxpayer must have adequate substantiation, such as a log or a diary. The record must include the date, mileage, and business purpose of each trip. The information must be recorded at or near the time incurred. There should also be a record of total mileage for the taxable year. There are apps for smartphones that enable the user to track mileage and email a report. Recordkeeping is crucial in the event of an audit. In the past 18 months, we have seen IRS auditors focusing on auto logs, which had not been a focus of audits in recent years.

Once it is determined that travel qualifies as business transportation, the next question is how much is deductible. There are two methods for determining the amount deductible — standard mileage rate and actual car expenses. The standard mileage rate for the second half of 2011 is 55.5 cents per mile. The standard mileage rate must be used in the first year the taxpayer deducts business expenses for the vehicle. If the standard mileage rate is not used, actual car expenses may be deducted. These expenses include depreciation, gas, insurance, repairs, etc. The expenses are prorated between the business miles and personal miles.

If transportation qualifies as a business expense and an employee substantiates the expenses to the employer, reimbursement will not be taxable income to the employee, nor will it be subject to payroll taxes. However, employer reimbursements or allowances in excess of substantiated expenses result in the full amount being taxable unless the employee is required to return excess amounts.

While this article assumes that the employee is driving his or her personal vehicle, the deductibility of transportation costs when the employee drives a company vehicle is also affected by commuting miles. Not only must the employee include in his or her taxable income a calculated amount that represents the value of personal usage, but the company’s depreciation expense may be limited if the personal use by a 5{06cf2b9696b159f874511d23dbc893eb1ac83014175ed30550cfff22781411e5} owner or a related person exceeds 50{06cf2b9696b159f874511d23dbc893eb1ac83014175ed30550cfff22781411e5}.

While identifying deductible business transportation may seem straightforward, almost nothing in tax law is easy. Understanding the rules and maintaining adequate records may result in increased deductions. You should discuss your specific facts with your accountant or tax advisor.

Terri Judycki is a senior tax manager with the Holyoke-based public accounting firm Meyers Brothers Kalicka, P.C.; (413) 536-8510.