IRS Audit Requirements – Mileage Logs
Motor vehicles are money-eaters — most small businesses’ biggest expense of all. Considering maintenance, insurance, gas and purchase prices, cars and trucks are larger than employee salaries. According to the latest IRS statistics, over 14% of all small business expenses are for vehicles.
So, even the IRS tells us – perhaps unintentionally – that autos can produce one of your largest business expense deductions. And, a vehicle can yield thousands of dollars in tax savings year-after-year. Sharing your car expense with Uncle Sam is guaranteed to give you a warm and fuzzy feeling!
Rules for tax-claiming business car and truck expenses are fairly straightforward, at least by tax code standards. Here are the top four commandments:
1. Thou shalt keep good records: the tax code says you must track your business miles. We all used to keep a paper log – often called a mileage log, mileage log book, mileage sheets or mileage books. Whatever you call it, know the IRS will accept digital versions, as long as it has the information covered below. Do you have a smart phone? There is an app that makes this easy as pie, or “pi” if you are more into math than dessert. It’s called MileCatcher and if will even back up your trip log online.
This is important for when IRS calls and want to deduct an audit they always go back at least three years. But records required is more than the log of trips. You will need a purpose for expensing it as a business expense. And you should keep your log up to date frequently disregard if you keep a paper log or on a smartphone app like MileCatcher.
2. If you, like most small biz operators, use the same car for business and pleasure, your second commandment: Thou shalt allocate driving between business and personal miles. Driving to and from work, aka “commuting,” trips to the mall and gawking at the scenery are all personal (and not deductible) driving. Business only.
3. Thou shalt choose between two tax deduction methods: Actual Expenses or Standard Mileage. You don’t have to decide (in most cases) until it is tax filing time. And, then the choice is made easily using tax prep software like Turbotax, or by your tax return preparer. My wild guess is that you are going to choose the method that saves you the most $$$.
4. Thou shalt report business miles on your tax return. The IRS requires you to tell them: when you started using your car for business, the total miles you drove for business in the year, the total miles you drove for commuting to work, the total miles you drove for personal use, and whether your car was available for personal use and if you had another vehicle for personal use, and last but not least: whether you have written evidence (a mileage log) to support your deduction. For most self-employed folks who are sole proprietors, this is all reported on Schedule C of their annual tax returns.
We’ll cover the details and show how the two deduction methods above work next. Now that you know the ground rules, get in your car, with your smartphone in your pocket or purse, with MileCatcher and rack up some tax deductible miles!
THE VERY EASIEST WAY TO TAX DEDUCT MILES
The simplest way to deduct business vehicle expenses is called the “Standard Mileage Method.” The alternative is the “Actual Expense Method.” Unless you like to overpay taxes, you’ll choose the biggest money saver at tax time.
The tax code lays out 4 steps for using the standard mileage method:
1. At the end of the year add up all your business driven miles. Take this number from your mileage records, using a hand-written log or a smartphone app, like MileCatcher. MileCatcher will provide you an up to date summary.
2. Enter the business miles number on your tax return. Sole proprietors, the majority of small business owners, report this on Schedule C or Form 4562. Don’t fret over which form, tax software like Turbotax, or a tax preparer will walk you through it.
3. The business miles are multiplied by the IRS
- standard mileage rate. The rate changes
- annually under an IRS formula (irs.gov).
- You won’t have to look it up if using tax
- software or a preparer. For 2017, the rate is
- 53.5 cents per mile.
4. Add the costs of parking, tolls and your state’s vehicle taxes to get your total vehicle expense deduction. Our friend Karl doled out $175 for valet parking and $300 in tolls for biz, so he adds these ($475) to his $5,350 standard mileage deduction and the grand total is $5,825.
Karl King, a hot shot real estate agent, drove his Cadillac Escalade 10,000 miles showing properties, getting listings, and attending sales seminars. Karl’s vehicle deduction, using the Standard Mileage Method is figured by multiplying 10,000 x 53.5 cents = $5,350. Simple, huh? He drove it another 5,000 miles attending rock concerts. Sorry KK, the R & R miles are personal and not deductible
So, how much would this save Karl come April 15? The answer depends on KK’s income tax bracket. His tax savings might range from 15% (a little over $900) to as much as 50% (about $3,000). This is counting KK’s federal income tax, self-employment tax, and state and local income taxes. KK sells homes mostly to his admirers in Beverly Hills, so he’s more likely to get the higher tax savings number — as if KK needed it!
TIP for Karl: Our example assumes that Karl chose the Standard Mileage Method of deducting his Caddy’s business driving. However, this is likely not the best way for KK to go, tax-wise. That is the next topic, the Actual Expense Method. You can find this info and much more in our free tax e-books at https://milecatcher.com/ebooks/