When Can I Estimate My Tax Deductions?   
by M. Paul Mahalick, MBA, CPA         

Syracuse, NY - September 15, 2006 - Having accurate books and records are requirements of all businesses and individuals seeking to take income tax deductions. However, in reality, businesses and individuals may not have all the required documentation and/or receipts to fully support each of their deductions. With this in mind, as professionals we ask the question – when can a taxpayer estimate tax deductions?

According to the American Institute of Certified Public Accountants (AICPA) Professional Standards, “unless prohibited by statute or rule, a member may use the taxpayer’s estimates in the preparation of a tax return if it is not practical to obtain exact data and if the member determines that the estimates are reasonable based on facts and circumstances known to the member. If the taxpayer’s estimates are used, they should be presented in a manner that does not imply greater accuracy than exists.” In other words, an estimate should look like an estimate. For instance, if a taxpayer estimates business mileage to be 1,000 miles - this looks like an estimate. However, if the same taxpayer informs you that their business mileage is 1,125 miles - this appears to be an accurate number.

The basis of this position by the AICPA Professional Standards is as follows – “accounting requires the exercise of professional judgment and, in many instances, the use of approximations based on judgment. The application of such accounting judgments, as long as not in conflict with the methods set forth by a taxing authority, is acceptable. These judgments are not estimates within the purview of this statement. For example, a federal income tax regulation provides that if all other conditions for accrual are met, the exact amount of income or expense need not be known or ascertained at year end if the amount can be determined with reasonable accuracy.”

By referring back to the aforementioned mileage example, ideally the taxpayer would have annual mileage logs indicating the destination of the business trips, the business purpose, the individual(s) that were met, the date and the number of business miles incurred. This mileage log will substantiate the number of business miles that the taxpayer has driven and it will be likely that the IRS would accept this form of documentation as support for the taxpayer’s mileage deduction. Moreover, this evidence is crucial to defend the deduction during an audit. The lack of the mileage log may cause the reversal of the mileage deduction. For example, in Tax Court Case Krist v Commissioner, TC Memo 2001, the court found that “the taxpayer failed to bring forth any evidence substantiating his claimed vehicle expenses. The court also noted that expenditures must be documented by means of account books, diaries, logs or other evidence. Here, the taxpayer’s lack of any documentary evidence of expenditures prevented the court from approximating expenses and ultimately barred their deductibility.”

However, if you have incomplete documentary evidence the IRS may allow mileage deductions under certain conditions. Per IRS Publication 463, if you do not have complete records to support a deduction, sampling may be an option. Specifically, a taxpayer can keep adequate records for a portion of the year, such as a detailed mileage log, and if the sample is representative of business periods throughout the year, the IRS most likely will allow your mileage deduction. 

With this in mind, it is clear that estimating tax deductions is allowable unless specifically in conflict with methods set forth by a taxing authority. However, in any case these estimated deductions need to be supported by evidence to obtain a tax benefit on a taxpayer’s return. In other words, the estimated deductions that a taxpayer makes need a reasonable basis and supporting evidence to be a valid business expense.

If you would like more information on this issue please feel free to contact Paul Mahalick at 315-701-6340.

Green and Seifter CPAs offers a wide array of professional services spanning decades of experience in the areas of accounting, auditing, bookkeeping, financial planning, fraud, and taxation to individuals and businesses throughout Central New York.

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