When tax time comes around, are you scrambling to gather auto deductions? Or worse, do you avoid deducting automobile expenses altogether, believing it’s too much of a hassle or not worth the effort?
Many small business owners miss out on significant tax deductions because they don’t keep track of business miles or do a poor job of record-keeping. But tracking miles doesn’t have to be a chore. You just need to get the right systems in place to make tracking business miles as easy and automatic as any other habit you follow day-after-day.
What’s Considered a Business Mileage Deductible?
When you drive your car for business purposes, you can take the standard mileage deduction (54 cents per mile for 2016) for every mile you drive for work purposes. Keep in mind, one important thing to remember about deducting business miles is that commuting miles are not deductible. For instance, if you drive to the office from home and work there all day before driving home again, you cannot deduct those miles.
But many people, even those who work in a single location, often forget about the many trips they take that qualify for a deduction. Those trips might be for travel between offices, to a customer’s premises, running errands for their business, meeting clients for coffee or lunch, scouting locations for a photo shoot or traveling to and from the airport for a business trip.
If you work from home, you may be able to avoid the commuting rules entirely. The key is to have your home office qualify as your principal place of business. Then any business-related driving is deductible. You don’t commute to your workplace because you are already there when you wake up in the morning.
If your home office is not your primary place of business, you can still avoid the commuting rule when you travel to a temporary work location. A temporary work location is any place where you realistically expect to work for less than one year. For instance, say you are a bookkeeper, and you typically work from a sublet office. Driving to and from that office every day is considered commuting miles and not deductible. You agree to take on a temporary job that involves working from a client’s office twice a week for two months. The client’s office is a temporary work location so your daily drive to and from their office would be deductible.
Here’s How to Keep Track of it All
Traditionally, small business owners track their mileage using a paper log. The log would include the number of miles driven (or beginning and ending odometer reading), the date and place of travel and the business purpose of the trip. Most people who choose to keep a paper log keep it in the car’s glove box and update the log each time they take a trip. This method is tried and true—that is, if you remember to use it and provide enough detail. Taxpayers have been denied deductions in the past because their logs were incomplete, contained too many errors or did not provide sufficient details.
Now, many people are turning to technology to facilitate mileage tracking. Apps such as MileIQ, TripLog and TrackMyDrive are available for iOS and Android. These apps make it easy to capture every mile you drive. Each time you take a trip, the app records your miles using GPS tracking and allows you to classify the trip as business, personal, medical, charity or another custom category. You can also record additional details such as who you met with and the business purpose of the trip.
If you didn’t keep good records in the past, those deductions are not lost. Keeping contemporaneous records is the preferred way, but the IRS does allow you to substantiate business miles by other means. If you are ever audited, the IRS will expect you to back up your reconstructed log by other methods.
One way of doing that is using your calendar. For example, your calendar might remind you that you met your client Susan for coffee at Starbucks on June 3rd at 9 a.m. In your reconstructed log book, you would note the date and location, that you met with Susan to discuss an upcoming project and calculate the round trip mileage. Hopefully, you will also have a receipt from that Starbucks visit as an additional backup. Between your recreated log, your calendar and the receipt, you have adequate documentation to withstand IRS scrutiny.
Standard Mileage vs. Actual Expenses: How to Deduct Auto Expenses
When you use one vehicle for both business and personal use, you have a choice of calculating your deductible car expenses by one of two methods: the standard mileage rate or the actual expense method. No matter which you choose, you will still need to track business miles.
Generally, you can calculate the deduction both ways, then use the one that gives you the biggest benefit. However, to use the standard mileage rate, you have to choose to use it in the first year that the car is used for business. In subsequent years, you can opt to use either the standard mileage rate or the actual expense method. If you lease the vehicle and choose the standard mileage method in the first year, you must use the standard mileage method for all subsequent years.
The standard mileage rate is issued by the IRS annually. For 2016, the rate is $0.54 per mile. So if you drove 5,000 business miles in 2016, your deduction under the standard mileage rate would be $2,700.
To use the actual expense method, you total up all of the costs of operating the vehicle and multiply them by the percentage of business use. Expenses include lease payments or interest paid on a financed vehicle, the cost of the license, insurance, title and registration, roadside assistance policies—as well as gas, maintenance, repairs, car washes, parking fees and tolls. For example, if your total vehicle expenses were $7,500 in 2016 and 30% of your miles were for business, your deduction would be $2,250 under the actual expense method. Keep in mind, fines and tickets, including parking tickets, are not deductible.
Lastly, Don’t Neglect the Little Details
- Avoid rounding your business mileage: Taxpayers who have not kept adequate records of business miles try to use a nice round number like 15,000 business miles with 10,000 of them for business. In the examples above, we used round numbers to make it easy, but in the real world, nobody drives exactly 15,000 miles in one year. Using round numbers is a red flag to the IRS that you are estimating your mileage—a big no-no.
- Don’t record the same business and personal mileage number from the previous year: No matter how hard you try, you would never be able to drive the exact same number of miles five years in a row. If you do, expect the IRS to want to see how you managed it.
- Don’t try to claim 100% of trips as business miles: Unless you have a second vehicle that is used solely for business, you are using that car to go grocery shopping, go out on the weekends or take a road trip for vacation. You’re inviting the IRS for an audit if you claim your vehicle is never used for personal reasons.
In the income tax world, we have an old saying: “Pigs get fat. Hogs get slaughtered.” Don’t be a hog. Keep good records and maximize the deductions for which you are legitimately entitled. You won’t pay more than you owe and you’ll keep from getting slaughtered by an IRS auditor.
Janet Berry-Johnson is a CPA and a freelance writer with a background in accounting and insurance. Her writing has appeared in Forbes, Parachute by Mapquest, Capitalist Review, Guyvorce, BonBon Break and Kard Talk. Janet lives in Arizona with her husband and son and their rescue dog, Dexter. Outside of work and family time, she enjoys cooking, reading historical fiction, and binge-watching Real Housewives.