Tracking your miles whenever you drive somewhere for your business can get pretty tedious, but remember that properly tracking your vehicle expenses and miles driven can lead to a significant reduction in your taxes.
Here are some tips to make the most of your vehicle expense deduction.
Keep track of both mileage and actual expenses. The IRS generally lets you use one of two different methods to track vehicle expenses – the standard mileage rate method or the actual expense method. One year the mileage method may result in a higher deduction, while the actual expense method may be higher in a subsequent year. But you won’t know which method results in a higher deduction unless you track both your mileage and actual expenses.
Consider using standard mileage the first year a vehicle is in service. If you use standard mileage the first year your car is placed in service, you can then choose which expense tracking method to use in subsequent years. If you initially use the actual expense method the first year your car is placed in service, you’re locked in to using actual expenses for the duration of using that car in your business. For a car you lease, you must use the standard mileage rate method for the entire lease period (including renewals) if you choose the standard mileage rate the first year.
Don’t forget about depreciation! Depreciation can significantly increase your deduction if you use the actual expense method. For heavy SUVs, trucks, and vans with a manufacturer’s gross vehicle weight rating above 6,000 pounds, 100% bonus depreciation is available through the end of the 2022 tax year if the vehicle is used more than 50% for business purposes. Regular depreciation is available for vehicles under 6,000 pounds with annual limits applied.
Don’t slack on recordkeeping. The IRS mandates that you track your vehicle expenses as they happen (this is called contemporaneous recordkeeping). You’re not allowed to wait until right before filing your tax return to compile all the necessary information needed to claim a vehicle deduction. Whether it’s a physical notebook you stick in your glove compartment or a mobile phone app, pick a method to track your mileage and actual expenses that’s most convenient for you.
Please call if you have any questions about maximizing your business’s vehicle expense deduction.
In late 2020, the IRS announced that it will increase tax audits of small businesses by 50 percent in 2021. Here are several mistakes to avoid if you do get audited by Uncle Sam.
Mistake: Missing income. A long history of investigating has led IRS auditors to focus on under-reported income. If you’re a business that handles cash, expect greater scrutiny from the IRS. The same is true if you generate miscellaneous income that’s reported to the IRS on 1099 forms. Be proactive by tracking and documenting all income from whatever source. Invoices, sales receipts, profit and loss statements, bank records—all can be used to substantiate income amounts.
Mistake: Higher than normal business losses. Some small businesses struggle in the early years before becoming profitable. If your company’s bottom line never improves, the IRS may view your enterprise as a hobby and subsequently disallow certain deductions. As a general rule, you must earn a profit in three of the past five years to be considered a legitimate business.
Mistake: Deductions lacking substantiation. Do you really use your home office exclusively for business? Does your company earn only $50,000 a year but claim charitable donations of $10,000? Do you write off auto expenses for your only car? The key to satisfying auditors is having clear and unequivocal documentation. They want source documents such as mileage logs that match the amount claimed on your tax return and clearly show a business purpose. If you can’t locate a specific record, look for alternative ways to support your tax return filings. In some cases, a vendor or landlord might have copies of pertinent records.
Mistake: No expense reports. If you use your credit card for business, create an expense report with account numbers and attach it to each statement. Then attach copies of the bills that support the charges. This is an easy place to blend in personal expenses with business expenses and auditors know it.
Mistake: No separate books, bank accounts or statements. Never run personal expenses through business accounts and vice versa. Have separate bank accounts and credit cards. A sure sign of asking for trouble is not keeping the business separate from personal accounts and activities.
Mistake: Treat the auditor as an enemy. Auditors have a job to do, and it’s in your best interest to make their task as painless as possible. Try to maintain an attitude of professional courtesy. If you’re called to their office, show up on time and dress professionally. If they come to your place of business, instruct staff to answer questions honestly and completely.
Optional standard mileage rates for business use of a vehicle will go down in 2016.
For business use of a car, van, pickup truck, or panel truck, the rate for 2016 will be $0.54 per mile, compared with $0.575 per mile in 2015. Taxpayers can use the optional standard mileage rates to calculate the deductible costs of operating a vehicle.
Driving for medical or moving purposes may be deducted at $0.19 per mile, which is four cents lower than for 2015. The rate for service to a charitable organization is unchanged at $0.14 per mile.