SMR vs AE

[TaxMan60601]

Hi guys,

Greeting to everyone on East Coast.

Here's tha case in brief.

Taxi driver. Actual expenses reported on last tax return, however changed car on March 1 and wants to avail on standard mileage rate now.

Can he and if yes how to report this car change on Sch. C, in ATX? Must he report depreciation on new car if actual car expenses in use?

Thanks in adv.

[kcjenkins]

Taxi is considered "commercial use" and were previously not eligible for standard mileage rate. Revenue Procedure 2010-51, 2010-51 I.R.B. 883. Removed the limitation on the use of the standard mileage rate for "automobiles used for hire, such as taxicabs" effective 1-1-2011. The change is not retroactive. Revenue Procedures applicable to previous years prohibited the use of the standard mileage rate for automobiles used for hire, requiring these taxpayers to use actual costs. So he can chose that method for the new vehicle. But make sure that he understands that he still has to keep good records. In fact, in an audit, they are going to want to see repair bills to help substantiate the mileage reported.

Salam v. Comm’r, 74 TCM 236, TC Memo. 1997-347, using the "cab formula" to determine that petitioner, a cab driver in Chicago, IL, had omitted income for the tax years in question.

• Substantiation of expenses: A taxicab driver failed to present any records to show that he was entitled to business expense deductions with respect to his taxicabs in excess of the amounts allowed by the IRS. Although the substantiation requirements [section 274(d)(4)] of individual expenses for listed property were inapplicable because taxicabs did not qualify as "passenger automobiles," the driver nonetheless failed to meet his burden of proof on the issue.
  
• Reconstructing income: The IRS properly used the "cab formula" (see the "Using the cab formula" section of this guide) to reconstruct the income of a taxicab driver who failed to maintain adequate records of his gross receipts and did not present any printouts from the taxi meters of his taxicabs as evidence of his method of calculating his gross receipts.
  

[kcjenkins]

W.R. Batt, Sr. v. Comm’r, 24 TCM 565, TC Memo 1965-104. On the evidence, and in the absence, of the taxpayer's records, the court determined that the earnings of an independent taxicab driver were in excess of the amounts reported. When a taxpayer fails to maintain records, necessitating income reconstruction by the Service under a formula, and the taxpayer takes the matter into litigation, courts view the Service’s method of accounting to be presumptively correct.

[kcjenkins]

From the Cash Intensive Businesses Audit Techniques Guide - Chapter 17

Lacking adequate records, the examiner can use the "cab formula" to reconstruct income or gross receipts. See e.g. Salami v. Comm’r, 74 TCM 236, TC Memo. 1997-347. This formula was developed during the IRS program involving taxicab drivers that looked at 1987 to 1989 returns in the Los Angeles, CA district. Tailored to the taxpayer, it remains a reasonable method for reconstruction. See the "Tax Law, Regulations, Court Cases, and Other Authorities" section of this guide for more information.

Using the taxi formula (a.k.a. the "cab formula")

The examiner’s first step is to calculate the amount the driver earns for entry. See Market Segment Specialization Program Guideline, TAXICABS, Exhibit C, 1993 WL 13156510. Annualize the driver’s approximate number of trips per year by multiplying the average number of customers per day by the number of days per year the driver works. Multiply this figure by the driver’s entry rate to get the total earned entry amount. Many times this data can be obtained from the transportation regulatory agency. In addition, many of the regulatory agencies include an average number of trips per shift and revenue by shift.

The second step is to figure business miles driven. Divide total fuel expense by average cost per gallon to get number of gallons used. Multiply number of gallons used by the vehicle miles per gallon to get total miles driven. Deduct non-business miles to get total business miles.

The third step calculates total gross receipts:

• Multiply total business miles by the rate the driver charges per mile
  
• Add the total earned entry amount
  
• Add tips and lease income
  
• Add any other income such as wait time
  

Subtract gross receipts per return from total gross receipts to figure unreported income.

[TaxMan60601]

Thanks a lot, KC.

"But make sure that he understands that he still has to keep good records. In fact, in an audit, they are going to want to see repair bills to help substantiate the mileage reported." This is the first thing we cleared up after every submited tax return and before sitting for the next one.

After a short discussion, it was decided to go on with the actual business expenses reporting as the client is okay with this.

Funny but he is kinda man who likes to call the stuff with their real names, you know

I must have missed that I.R.B. 10-51. In the same time this Techniques Guide is very useful indeed - the last revision of pub 917 I found was from 1995.

Once again, thanks for sharing and sorry for the late post.

Case closed.

[kcjenkins]

Glad that helped. It's so nice when the client asks first, isn't it? Instead of asking his barber or his brother-in-law who works in a bank, etc. I always thought the old rule on taxi's made sense, I do not understand why they changed it.