Mileage Myths Busted: Khan v. Commissioner Puts Landlords and Small Businesses on Notice

Ah yes, the famous Cohan v. Commissioner rule from 1930. It says the court can estimate a tax deduction if a taxpayer clearly incurred an expense but lacks full documentation. It’s the “we’ll take your word—partly” rule.

Here’s the catch: the Cohan rule does not apply to expenses covered by IRC Section 274(d). Congress decided long ago that mileage, travel, meals, and entertainment require strict proof—no guessing, no estimation, no “close enough.” In other words, you can guesstimate office supplies, but not business miles.

So when taxpayers argue, “But we obviously used the car for business,” the court responds, “Great—show us the log.” Khan couldn’t, and that’s the end of the road.

Representative Period Annualization

The IRS can allow annualizing mileage under certain conditions, but it’s a narrow and carefully defined exception, not a substitute for full-year contemporaneous logs. The IRS acknowledges that maintaining a daily log for 365 days may not be practical, and so it permits using a representative sample — usually a contemporaneous 90-day (or longer) log — if it’s truly representative of the vehicle’s use throughout the year.

IRS Publication 463 (Travel, Gift, and Car Expenses, 2024) reads in part-

If you use your vehicle for both business and personal purposes, you must keep records showing the business miles. You can use a sample period (such as a representative month) to determine the business-use percentage if you can show that the sample period is typical of the entire year.

That’s the key phrase: “if you can show that the sample period is typical.” As such, if your log demonstrates consistent use and nothing material changes (like a new client, new route, or different workload), you may annualize by multiplying that representative sample to cover the year. Keep in mind two prongs to this approach-

• You must still have a log that is incredibly detailed and accurate, AND
• You must prove that the representative period truly represents the entire year if annualized.

Why This Matters for Small Businesses

For small business owners, and landlords alike, vehicle and travel deductions are the top two areas that collapse under IRS scrutiny. People keep receipts in glove boxes, jot notes on napkins, or worse—try to reconstruct mileage at year-end. That’s like building a logbook from Google Maps and good intentions.

For those operating S Corps the safest approach (and only approach) is an Accountable Plan. It allows you to reimburse yourself for legitimate mileage and expenses, pushing the tax deduction to the business return instead of your personal one. If your vehicle is personally owned, pay yourself the IRS standard mileage rate (70 cents per mile for the 2025 tax year) and keep a clear log of business miles. Done right, it’s clean, compliant, and defensible.

Sidebar: Why is Accountable Plan. or APlan in WCG parlance, safest? S Corps have a 0.1 to 0.3% audit rate versus your Schedule C and Form 1040 (individual tax return) which could easily be 4% to 8%, and could be higher with increased travel deductions. Why is the only approach? As an S Corp shareholder, you are paid a W-2 wage. There is not a place on your 1040 tax return to deduct expenses against your W-2 (this ended with Tax Cuts and Jobs Act of 2017).

Why Landlords Should Care Too

“Wait,” you might say, “I’m just a landlord, not a business owner.” Sorry, the same rules apply. If you’re driving to your rental property, meeting contractors, or picking up supplies, that’s a business activity under IRC Section 274(d).

Our rental property book puts it this way: treat your vehicle like a business vehicle if you use it for property management. That means documenting every trip: date, destination, business purpose, and mileage. A scribble like “rental errands” doesn’t cut it.

Landlords often get tripped up by mixed-use vehicles—the family SUV that doubles as the “property manager car.” You can’t just call it 50% business because it “feels right.” You need evidence. Keep a log showing which trips were for rentals and which were personal. The business percentage determines how much of your mileage, gas, insurance, and maintenance is deductible. Without proof, you risk losing it all—just like Khan.

Mixed-Use Means Mixed Risk

Vehicles are magnets for IRS attention because they’re easy to abuse (yes, yes, everyone else but now you, we get it). Everyone drives somewhere every day, so distinguishing personal from business use matters. A dedicated business vehicle (titled in the business and used solely for work) is clean. A mixed-use vehicle is not a red flag, but it requires careful documentation and good habits.

Khan reminds us that when you blur the line, the IRS sees only gray—and gray turns to red ink. The court specifically rejected estimates or blanket percentages. “Mostly business use” isn’t evidence; it’s wishful thinking.

The rule is simple: if you want the deduction, act like an auditor’s watching.

WCG’s Practical Tips (So You Don’t Become a Khan)

• Use a mileage-tracking app. MileIQ, TripLog, Everlance—take your pick. They automatically log date, route, and distance. You just tag each trip as business or personal, and then add a note. You MUST add the note on why it is business.
• Keep receipts with context. For vehicles that are 100% business use, a gas or toll receipt is worthless without knowing why you incurred it. Write “trip to 456 Elm St. rental for repairs” on the receipt.
• Separate business and personal. If you can swing it, dedicate a vehicle for business use. If not, track the split with precision. Dedicate rental use can be a challenge unless you have several. Read more about buying a business vehicle for your rental properties.
• Document travel purpose. For flights, lodging, or meals on the road, include the “why.” “Met property manager for 123 Elm Street” beats “Vegas meeting.”
• Audit yourself quarterly. Pretend you’re the IRS—open your own records and see if you’d believe your own story.