As a small business owner you likely already know that there are multiple tax deductions you can (and should!) take advantage of. Expenses like office supplies, new equipment, payroll, and cost of goods sold are relatively easy to remember to deduct on your tax return. But there are other expenses, like the home office or mileage deductions, that are often overlooked or misunderstood.
You are putting a lot of time and work into your business. And I’m here to help you get the most out of your tax return and better understand everything that you qualify for!
Because let’s be real. If you can lower the amount that you will end up owing, wouldn’t you want to?
Let’s turn those miles into money and take advantage of the business mileage deduction.
Who qualifies for the mileage deduction?
First things first, we need to determine if you qualify.
Are you are a self-employed individual, such as entrepreneur or contractor? AND do you use your vehicle for business travel?
If you’re shaking your head yes to both of these questions, then good news! You are legally allowed to deduct business traveling expenses.
What mileage is considered deductible?
The majority of self-employed individuals find that their work and personal time are highly intertwined. Since you have more freedom than you would at a typical 9-5 office job, it’s likely you will find yourself switching between personal activities and work multiple times throughout the day and even possibly multiple times in a single given hour. (Think driving to pick up groceries then making a pit stop at an office supply store for your business). Since there is potentially a lot of overlap between your personal time and work time, it’s important to understand what the IRS considers allowable under the businesses mileage deduction.
There aren’t clear cut, specific rules or guidelines to follow when determining what is and isn’t business. It’s going to be based on each circumstance individually. A few examples of what would qualify as business travel are:
One thing to note is that if you use your car exclusively for business, then all of your vehicle expenses are deductible. Whereas if your vehicle is used for both personal and business matters, only the business portion can be expensed on your tax return.
It’s also important to distinguish that your commute (your drive from home to your business office) is NOT a deductible expense UNLESS your home office is considered your principal place of business. Read more about home offices and the home office deduction here.
How do you calculate the deduction?
The IRS has outlined two allowable methods for calculating vehicle traveling expenses. Here’s a quick breakdown of how each of those methods work:
Under the mileage method, you multiply the amount of business miles by the current deduction rate.
In 2019 the current deduction rate was 58 cents. So let’s use that in an example! If you drove 1,000 business miles in 2019, your business expenses would be $580 (1,000 miles x 58 cents per mile).
Pretty straightforward calculations! The mileage rates are set by the IRS and change year to year so be sure to check the current rates before preparing your return.
The actual expense method is not as popular as the standard mileage rate because it requires more record keeping. While the thought of keeping even more records likely doesn’t excite you, a plus side to this method is that it can lead to a larger deduction. This is especially true if you have a gas guzzler or a car that requires regular repairs.
To claim this deduction, you would add up all the vehicle expenses such as gas, maintenance, repairs, insurance, registration fees, and depreciation. Then multiply the total expenses by your business use. Because you need to know how much the car was used for business vs personal time, you’re still required to keep detailed record of your car usage.
Unlike some deductions, there are no limits to the mileage deduction. This mean the more business miles you drive, the more money you will save during tax time.
What information is needed?
In order to properly calculate your business deduction, you must record your travel expenses. Be meticulous. If audited, the IRS will request records. The more detail you’ve included, the better!
Start with the date of your travel then include details such as: beginning miles, ending miles, where you traveled to, the purpose of the trip, etc.
Keep in mind that if you are on your way home from meeting with a client and stop to pick up your dry cleaning, that’s when you would note the end of your business trip. At that point it would be considered personal!
If you decide to take actual expenses, in addition to a mile log, you should keep receipts and track:
Tracking this might sound like a lot at first, but with some practice it will become second nature for you. If you prefer to keep track on your phone, there are a handful of useful apps that will track your miles for you. If you like the idea of using pen and paper instead that works too! One thing I would suggest if you go this route is to keep a mileage log, pen, and envelope (to save receipts) in your glove compartment so it’s easy to reach when you need it. There are also handy mileage log notebooks for purchase that help you to track detailed information. Or, you can always try a computerized spreadsheet log if that’s more your style.
As you can see there are a lot of ways to accomplish the same task. Different methods are going to work better for different people, so figure out what works the best for you! The most important thing is that you find something you can be consistent with.
It takes some work upfront keeping accurate records, but it can have a huge payoff for you so it’s definitely worth it! Start tracking today and save yourself some serious money!
For further information on record keeping, refer to Topic No. 305.
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