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Calculate your possible fiscal cliff tax bill

Do too many business owners detour from accurate auto expense claims?

It's a big weekend here in Austin. After a five year absence, Formula 1 racing has returned to the United States and the Circuit of the Americas track just southeast of the Lone Star State capital is host.

While the multi-million dollar F1 machines are speeding around the track, folks who aren't race fans are trying to go about their business in a city where travel already is a challenge.

Circuit of the Americas F1 track Austin Texas        Photo courtesy Circuit of the Americas

That's why I'm glad I work from home and don't have to deal with a daily commute. But I must pay attention to the tax rules when I do hit the road for business.

Close IRS eye on business income, expenses: As a small business owner who files a Schedule C each year, I'm a prime target for special Internal Revenue Service examiner interest.

The fact that I claim auto costs on the form also means added IRS scrutiny.

Why the extra attention from the IRS? Because Uncle Sam must rely on all self-employed taxpayers to accurately report their income. Although we do get some 1099-MISC forms that show how much we made on specific jobs and which are copied to the IRS, we also tend to get other, smaller payments that don't trigger reports to the tax man.

And then there are our expenses.

The IRS is at the mercy of our honesty even more here since in most cases it falls solely to us to include costs related to our businesses.

Were those notebooks purchased at Wal-Mart really for a work project or did the kids take them to school?

Did that expensive leather iPad cover really help you do your job?

And what about the iPad itself. Are you truly just using it for job related searches or are you spending some time watching Children's Hospital webisodes on that incredibly clear Retina display screen?

The IRS makes no secret that in an effort to close the tax gap it is looking at Schedule C filers who have a bit more leeway with expense claims as noted above.

And business use of personal vehicles is one of those areas where the IRS believes it is leaving some valuable tax money on the table.

Correctly claim auto expenses: Now neither the IRS nor I are saying stop claiming your legitimate auto expenses here. Just do so properly.

For business transportation, the IRS says you need to record the date you started using your car for business, the mileage for each business use and the total miles for the year. You're familiar with this data if you've ever claimed your car expenses on Schedule C.

As for those "each business use" of the vehicle, you need to note the date, your business destination and the business purpose of the trip.

When you're like me and use your car partially for business and partially for personal tasks, the IRS says we need to divide our expenses between those two uses. You can do so based on the miles driven for each purpose and offers this example in Publication 463:

You use your car to visit the offices of clients, meet with suppliers and other subcontractors, and pick up and deliver items to clients. There is no other business use of the car, but you and your family use the car for personal purposes. You keep adequate records during the first week of each month that show that 75% of the use of the car is for business. Invoices and bills show that your business use continues at the same rate during the later weeks of each month. Your weekly records are representative of the use of the car each month and are sufficient evidence to support the percentage of business use for the year.

You also can batch your business travel and count that as one trip. That's a habit I got into as gas prices went up. I didn't want to make more trips than I had to so that I didn't have to fill up the old Chevy any more than necessary.

Again, directly from the IRS:

You can account for several uses of your car that can be considered part of a single use, such as a round trip or uninterrupted business use, with a single record. Minimal personal use, such as a stop for lunch on the way between two business stops, is not an interruption of business use.

But don't push it. If, for example, when I drive the 100 miles round-trip to visit my mother I decide to stop at the Staples near her home to pick up some office supplies, I can't count that 100 miles as a business trip just because I made a quick work-related stop.

If I really wanted to count the trip to pick up necessary work material, I'd need to pop into my local Austin office supply store when I got home.

Exaggeration hurts all taxpayers: Some people, however, do take advantage of business mileage claims and by a lot, according to an op-ed in the New York Times by James R. Alm, professor of economics at Tulane, and Jay A. Soled, professor of accounting and information systems at Rutgers Business School.

The duo cites IRS data showing that about 10 million drivers break the business mileage deduction rules every year. In addition, more than 60 percent of the 16 million taxpayers who claim business-related auto expenses each year do so inaccurately.

Some errors benefit the government, as when taxpayers mistakenly classify business-related expenses as personal ones, say Alm and Soled. But the net result is a loss of about $6 billion in annual tax revenue.

The profs hope that the folks on Capitol Hill who are looking for ways to avoid the fiscal cliff are paying attention to those numbers.

Alm and Soled argue in their column that:

Congress can start by simplifying the deductibility rules and exceptions that currently confront drivers. It should also require more detailed expense reporting by taxpayers who use their cars for work; institute stricter requirements for write-offs; cap total auto-related deductions; and stiffen penalties for violators. (Thanks to technology, keeping track of business-related auto travel is far easier now than it was in the 1980s.) Congress might even go further and limit deductible car expenses to employers who actually own the vehicles in question and use them almost exclusively for business. These measures might be unpalatable, especially to some small-business owners, but they deserve examination.

And it's not just a matter of revenue. Remember that fair share mantra used by the president during his campaign? Alm and Soled say it apples to business mileage deductions, too.

"Americans who are already struggling to cover their commuting costs shouldn't have to pay even more at the pump to subsidize those motorists who are filling up on their dime," say the professors.

Do you use your personal vehicle for business purposes? Do you claim them as expenses on your tax return?

Would tougher auto deduction requirements cause you to quit claiming the costs? Or would you just get more creative in your claims?

Let me and readers know by leaving a comment, using a pseudonym if you wish!

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