Words you may need to know (see Glossary):
- Business/investment use
- Circumstantial evidence
- Documentary evidence
You cannot take any depreciation or section 179 deduction for the use of listed property unless you can prove your business/investment use with
adequate records or with sufficient evidence to support your own statements. The period of time you must keep these records is discussed later under
How Long To Keep Records.
Adequate Records
To meet the adequate records requirement, you must maintain an account book, diary, log, statement of expense, trip sheet, or similar record or
other documentary evidence that, together with the receipt, is sufficient to establish each element of an expenditure or use. You do not have to
record information in an account book, diary, or similar record if the information is already shown on the receipt. However, your records should back
up your receipts in an orderly manner.
Elements of expenditure or use.
Your records or other documentary evidence must support all the following.
- The amount of each separate expenditure, such as the cost of acquiring the item, maintenance and repair costs, capital improvement costs,
lease payments, and any other expenses.
- The amount of each business and investment use (based on an appropriate measure, such as mileage for vehicles and time for other listed
property), and the total use of the property for the tax year.
- The date of the expenditure or use.
- The business or investment purpose for the expenditure or use.
Written documents of your expenditure or use are generally better evidence than oral statements alone. A written record you prepare at or near the
time of the expenditure or use has greater value as proof of the expenditure or use. You do not have to keep a daily log. However, some type of record
containing the elements of an expenditure or the business or investment use of listed property made at or near the time and backed up by other
documents is preferable to a statement you prepare later.
Timeliness.
You must record the elements of an expenditure or use at the time you have full knowledge of the elements. An expense account statement made from
an account book, diary, or similar record prepared or maintained at or near the time of the expenditure or use is generally considered a timely record
if, in the regular course of business:
- The statement is given by an employee to the employer, or
- The statement is given by an independent contractor to the client or customer.
For example, a log maintained on a weekly basis, which accounts for use during the week, will be considered a record made at or near the time of
use.
Business purpose supported.
Generally, an adequate record of business purpose must be in the form of a written statement. However, the amount of backup necessary to establish
a business purpose depends on the facts and circumstances of each case. A written explanation of the business purpose will not be required if the
purpose can be determined from the surrounding facts and circumstances. For example, a salesperson visiting customers on an established sales route
will not normally need a written explanation of the business purpose of his or her travel.
Business use supported.
An adequate record contains enough information on each element of every business or investment use. The amount of detail required to support the
use depends on the facts and circumstances. For example, a taxpayer whose only business use of a truck is to make customer deliveries on an
established route can satisfy the requirement by recording the length of the route, including the total number of miles driven during the tax year and
the date of each trip at or near the time of the trips.
Although you generally must prepare an adequate written record, you can prepare a record of the business use of listed property using a computer
memory device that uses a logging program.
Separate or combined expenditures or uses.
Each use by you is normally considered a separate use. However, you can combine repeated uses as a single item.
Record each expenditure as a separate item. Do not combine it with other expenditures. If you choose, however, you can combine amounts you spent
for the use of listed property during a tax year, such as for gasoline or automobile repairs. If you combine these expenses, you do not need to
support the business purpose of each expense. Instead, you can divide the expenses based on the total business use of the listed property.
You can account for uses that can be considered part of a single use, such as a round trip or uninterrupted business use, by a single record. For
example, you can account for the use of a truck to make deliveries at several locations that begin and end at the business premises and can include a
stop at the business in between deliveries by a single record of miles driven. You can account for the use of a passenger automobile by a salesperson
for a business trip away from home over a period of time by a single record of miles traveled. Minimal personal use (such as a stop for lunch between
two business stops) is not an interruption of business use.
Confidential information.
If any of the information on the elements of an expenditure or use is confidential, you do not need to include it in the account book or similar
record if you record it at or near the time of the expenditure or use. You must keep it elsewhere and make it available as support to the IRS director
for your area on request.
Substantial compliance.
If you have not fully supported a particular element of an expenditure or use, but have complied with the adequate records requirement for the
expenditure or use to the satisfaction of the IRS director for your area, you can establish this element by any evidence the IRS director for your
area deems adequate.
If you fail to establish to the satisfaction of the IRS director for your area that you have substantially complied with the adequate records
requirement for an element of an expenditure or use, you must establish the element as follows.
- By your own oral or written statement containing detailed information as to the element.
- By other evidence sufficient to establish the element.
If the element is the cost or amount, time, place, or date of an expenditure or use, its supporting evidence must be direct, such as oral testimony
by witnesses or a written statement setting forth detailed information about the element or the documentary evidence. If the element is the business
purpose of an expenditure, its supporting evidence can be circumstantial evidence.
Sampling.
You can maintain an adequate record for part of a tax year and use that record to support your business and investment use for the entire tax year
if it can be shown by other evidence that the periods for which you maintain an adequate record are representative of use throughout the year.
Example 1.
Denise Williams, a sole proprietor and calendar year taxpayer, operates an interior decorating business out of her home. She uses her automobile
for local business visits to the homes or offices of clients, for meetings with suppliers and subcontractors, and to pick up and deliver items to
clients. There is no other business use of the automobile, but she and family members also use it for personal purposes. She maintains adequate
records for the first three months of the year showing that 75% of the automobile use was for business. Subcontractor invoices and paid bills show
that her business continued at approximately the same rate for the rest of the year. If there is no change in circumstances, such as the purchase of a
second car for exclusive use in her business, the determination that her combined business/investment use of the automobile for the tax year is 75%
rests on sufficient supporting evidence.
Example 2.
Assume the same facts as in Example 1 except that Denise maintains adequate records during the first week of every month showing that 75% of her
use of the automobile is for business. Her business invoices show that her business continued at the same rate during the later weeks of each month so
that her weekly records are representative of the automobile's business use throughout the month. The determination that her business/investment use
of the automobile for the tax year is 75% rests on sufficient supporting evidence.
Example 3.
Bill Baker, a sole proprietor and calendar year taxpayer, is a salesman in a large metropolitan area for a company that manufactures household
products. For the first three weeks of each month, he occasionally uses his own automobile for business travel within the metropolitan area. During
these weeks, his business use of the automobile does not follow a consistent pattern. During the fourth week of each month, he delivers all business
orders taken during the previous month. The business use of his automobile, as supported by adequate records, is 70% of its total use during that
fourth week. The determination based on the record maintained during the fourth week of the month that his business/investment use of the automobile
for the tax year is 70% does not rest on sufficient supporting evidence because his use during that week is not representative of use during other
periods.
Loss of records.
When you establish that failure to produce adequate records is due to loss of the records through circumstances beyond your control, such as
through fire, flood, earthquake, or other casualty, you have the right to support a deduction by reasonable reconstruction of your expenditures and
use.
How Long To Keep Records
For listed property, you must keep records for as long as any excess depreciation can be recaptured (included in income).
Recapture can occur in any tax year of the recovery period.
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