May 29, 2018

Deducting Mileage for Business With Minimal Activities

Tax Relief Articles

Houston Tax Attorney

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Can you deduct car and truck expenses, such as mileage, if your business has minimal activities?  The court addressed this in Samadi v. Commissioner, T.C. Summary Opinion 2018-27, which provides an opportunity to consider the question.

Facts and Procedural History

The facts and procedural history for the case are not unusual.  The taxpayer obtained a real estate license with the intent to flip houses.  He incurred car and truck expenses for driving around looking at properties, but never purchased or sold any properties.  He then deducted the car and truck expenses–his mileage–for driving around looking for properties.  The mileage resulted in a loss reported on his tax returns.  The IRS audited the tax return and disallowed the loss, and litigation ensued.

Car and Truck Expenses

Car and truck expenses can be deductible for income tax purposes.  They are deductible under Sec. 162 as ordinary and necessary business expenses.

Taxpayers can deduct their actual costs or use the standard mileage rates.  The rate was $0.54.5 per mile in 2018.  For those who drive a significant number of miles, the standard mileage rates usually produce the largest deduction.

Sec. 274 adds a heightened substantiation requirement for car and truck expenses.  It essentially obligates taxpayers to keep detailed mileage logs.

Most IRS disputes involving car and truck expenses focus on the lack or inadequacy of mileage logs.  But even if the taxpayer has adequate mileage logs, they still may not be able to deduct their mileage.

The Trade or Business Requirement

This brings us to the Samadi case.  In Samadi, the taxpayer had mileage logs.  The court did not get to the question as to whether the logs were adequate, as it decided the case based on the taxpayer’s minimal business activities.

The court noted that car and truck expenses, such as mileage, have to be incurred for a “trade or business.”  This term is not defined in the Code.  It generally means something more than a hobby or an investment.

The court concluded that the taxpayers activities of driving his family around to look for real estate amounted to something less than a trade or business:

At best, petitioner husband’s activity in 2013 and 2014 was in the exploratory or formative stages of forming a business of flipping houses. Carrying on a trade or business requires more than initial research into a potential business opportunity; it requires that the business have actually commenced.

This states the general rule.  To be deductible, the car and truck expenses have to be for a business that has actually commenced.  Thus, had the taxpayer purchased or sold a single property, based on this case, the expenses may have been deductible.

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