“I need to document my mileage?”
If you own your own business, the mileage deduction is something you should think about. What do you need to do today? The answer: track your mileage.
We will talk about:
- Why track it
- Methods to use for tax deduction
- What to track
- FAQ’s – some common questions I get asked
But it all starts with the realization that you need to track mileage.
If you do not own your own business, sure you may be able to deduct mileage. But there are rules and more rules. And some of the rules changed in 2018. So, check with your tax accountant. For this post, we are going to focus on entrepreneurs who drive their personal vehicle for business. So, if you are an entrepreneur, let’s dig in.
Why track mileage?
A main reason entrepreneurs should track mileage: you have the opportunity to use it as a deduction on Income Taxes.
As an accountant I look for good information because information can help entrepreneurs make better decisions.
By tracking mileage, you will have solid information instead of a guesses. As you analyze your business and look at the Profit and Loss Statement, the mileage information may give you insight as to why auto expenses (such as fuel) increase or decreasd. It is one more tool to help you understand what is going on in your business.
Track information so when you need it, you have it.
Method: Mileage calculation deduction
The first thing is to choose a method.
This method multiplies business miles by the standard mileage rate stated by the IRS.
Tax deduction Rates
The following are the deduction rates for taxes:
- Standard mileage rate for 2017: $0.535 per business mile
- Standard mileage rate for 2018: $0.545 per business mile
- Standard mileage rate for 2019: $0.580 per business mile
- Standard mileage rate for 2020: $0.575 per business mile
Adding small savings from every business trip can add up to a worthwhile deduction on your tax return.
Additional Deductions even with the mileage calculation
The standard mileage rate for business deduction is calculated on studies of the cost of operating a vehicle.
- So, if you use this method, you CAN’T also deduct actual vehicle costs like:
- gas and oil
- depreciation of the vehicle
- repairs, tires, maintenance
- licenses, etc.
- But if you choose to use the mileage calculation, you CAN still deduct actual costs for
- interest on a vehicle loan
- property tax
- parking, and tolls
Method: Actual cost deduction
There is another method to use to determine the deduction instead of mileage calculation using standard rates. You can use actual vehicle expenses.
- You need to choose the deduction method: standard mileage calculation or actual method.
- If you have an accounting system, you are already tracking the vehicle expenses like gas, tires, repairs, etc.
- An important note: For the actual expenses method, still keep a mileage log.
- The IRS website states “For actual expenses, a mileage log helps establish business use percentage. “
What to track
Key items to document
- From Location – To Location
- Specifically record the name of the place and the address of the location you met at
- Who you met with and the purpose (the purpose is important)
- Business miles driven
- Also, the IRS wants additional information:
- Record your odometer as of 1/1 and 12/31
- Total miles for the year – with the total for business miles and the total for personal miles
Proof for the IRS
You may be thinking: “This is great, I want a deduction. But, tracking is annoying. I’ll estimate and throw something together and take the deduction”.
This is not a good thought. I’m a believer in doing the right thing just for the sake of doing the right thing. But, another reason is you can be at risk. If you claim a mileage deduction AND you are audited by the IRS, they want to see a mileage log. They want you to prove your deduction through documentation.
And the log should be “contemporaneous” –meaning you record the mileage at the time it happens, not months or years later when you do taxes or get audited.
Mileage deduction: questions clients frequently ask
Here are some common questions I get asked:
Can I change my mind on the method?
Sometimes clients will ask if they can choose a method and then change their mind later.
- If in year 1 you choose the mileage deduction method, you can change in later years.
- If in year 1 you choose the actual expenses method, you can’t change to mileage in later years for that vehicle.
Think it through, talk to your tax accountant, and choose the deduction method: standard mileage rate or actual expenses.
I don’t drive much for personal, can I just total all miles? | Answer: No.
- You need to track and document your business mileage.
- Only count the business miles when you calculate your deduction.
But I have a vehicle that is 100% business. Now am I off the hook for a log? | Answer: No.
- You may have a second vehicle 100% devoted to business. You are still required to keep a log
Here are a few more common questions I get asked
Can I count my mileage to and from my regular place of business? | Answer: No.
- This is a popular question. This is called a “commute”.
- Your first drive to your office and your last dive home are considered personal expenses.
- BUT if you have a qualified home office, which you may have as an entrepreneur, you are at the office.
- So, when you drive to a client (even your first drive of the day), it is business mileage.
What if I lease a car? | Answer: Still choose a method.
- Choose actual expenses or the mileage deduction.
- If you choose the mileage deduction the 1st year, you must continue to use that method throughout the entire lease period.
- Either way, track your mileage.
Since I have to document this info, do I also submit it with my tax return? | Answer: No.
- This documentation, many times called a Mileage Log, is for you to keep.
- Make sure to keep it in case you are audited by the IRS.
Again, if you have questions and you have an accountant, talk with them or, go directly to a tax CPA.
We talked about some details of the mileage Deduction. We even talked about using another method: actual expenses.
Hopefully, your realization is: you should track mileage and determine the tax deduction. In addition as you give this thought, I hope you use mileage tracking as one more piece of information to better run your business. Set up a process.