One of the more common questions that I’ve fielded when working with solo practitioners and other small business owners is the mileage deduction question. Somewhere, someone has whispered into all these aspiring business owners that the best part of running your own business is the ability to deduct everything – especially your vehicle costs! In the words of Lee Corso, “Not so fast, my friend.”
Yes, there are definitely rules that allow for the deduction of your vehicle costs, but you want to develop clear processes and guidelines that follow the IRS rules because this is one of their favorite areas to scrutinize when reviewing your tax return. The information below is intended for those that do not use their vehicle entirely for business purposes. If you use your vehicle entirely for business purposes (and yes, the IRS will make sure that it is 100% for business purposes), then you get to deduct all the costs associated with that vehicle. For those that use your vehicle for both personal and business purposes, here’s how to calculate your vehicle deduction:
Step 1: Determine the portion of your vehicle usage that is for business purposes.
You are using your vehicle for business purposes if you drive your vehicle from your office to another office or work site location to meet with a client or attend a work related event.
In most cases, daily transportation costs cannot be deducted. For example, driving from your home to your office would be considered a daily transportation cost and would not be eligible for deduction. The two exceptions to this rule are the following: (1) you have one or more regular work locations away from your residence or (2) your residence is your principal place of business and you incur expenses going between the residence and another work location in the same trade or business, regardless of whether the work is temporary or permanent and regardless of the distance.
Step 2: Calculate your vehicle deduction using either the actual cost or standard mileage rate methodology.
Actual costs: You have the ability to deduct the pro rata portion of your actual vehicle costs. Vehicle costs that qualify for deductions include the following: depreciation, licenses, lease payments, registration fees, gas, insurance, repairs, oil, garage rent, tires, tolls, and parking fees. In this method, you add up all the qualifying costs and allocate those costs between business and personal use. For those costs allocated to business usage, you get to take these as a deduction. For example, assume you had $8,500 of qualifying costs during the prior year, and you drove your car a total of 11,000 miles. Of the 11,000 total miles, 5,000 miles were considered for business use (as determined in Step 1). The amount of actual costs you could deduct would be $3,863.63 [(5,000 business miles / 11,000 total miles) x $8,500 of qualifying costs].
Standard mileage rate: A shortcut to the actual cost methodology is to take the standard mileage rate deduction. The IRS calculates a standard mileage rate each year based on the fixed and variable costs to operate a vehicle. In 2014, the standard mileage rate is $.56. This methodology simply calculates the miles driven for business purposes (as determined in Step 1) and multiplies by the standard mileage rate. Going back to our example, you drove 5,000 miles for business purposes in the previous year, then your vehicle deduction would be $2,800 [5,000 business miles x $.56 standard mileage rate].
If you want to use the standard mileage rate deduction, you must choose this methodology in the first year the car is available for use in your business. You can only choose one methodology during the course of a year.
Maintaining complete, accurate, and timely records will reduce any issues with the IRS. The IRS will typically take a detailed look at transportation costs when analyzing a business tax return, so it’s recommended to be proactive in maintaining good records for your vehicle deductions.
For an easy to use template for tracking and calculating your vehicle deduction, use the Standard Mileage Reimbursement spreadsheet at www.trustbooks.com/mileage.
Use the standard mileage calculation. The actual cost methodology sounds great in theory and could yield you a larger deduction (this would need to be evaluated on a case by case basis), but the time and headache to track the actual cost methodology is not worth the potential savings. You need to be extremely organized and have a lot of free time on your hands to justify the use of the actual cost methodology over the standard mileage rate calculation.
Keep an organized and complete calendar with all your meetings. If you’re like me, you will never be able to update the Standard Mileage Reimbursement spreadsheet in real time. By having a complete calendar with some minimal information on your meetings, like meeting location and meeting attendees, you can go back and calculate your vehicle deduction at your leisure.
Cut yourself a physical check for your vehicle deduction on a monthly basis. For example, complete the Standard Mileage Reimbursement spreadsheet each month and write a check for the Total Reimbursement owed. A couple of reasons why I recommend this: 1) This will show up in your financials as an expense which will allow you to see it more visibly when reviewing your financials as opposed to a tax adjustment and 2) everybody loves to get a little cash going into their personal bank account!
Tom Boyle is a Co-Founder of TrustBooks, cloud software created to help attorneys manage, record, and reconcile their trust accounts. Prior to TrustBooks, Tom owned Boyle CPA, a CPA firm that provided accounting and consulting services to small businesses with a focus on law firms. For additional resources on managing and understanding your trust account, join the TrustBooks mailing list at www.trustbooks.com.
Tom Boyle is Co-Founder of TrustBooks, web-based software for managing trust activity in compliance with state bar requirements. TrustBooks is simple and intuitive, so trust accounting isn’t intimidating. Prior to TrustBooks, Tom owned Boyle CPA, a CPA firm that provided accounting and consulting services to small businesses with a focus on law firms. TrustBooks offers a 30 day free trial at www.trustbooks.com.