The auto deduction is one of the most popular tax deductions on the planet. Okay, I can’t verify that, but I do know that I encourage most of my clients that are eligible to take this deduction because it can make a huge difference in their tax refund results.
The Auto Deduction can help save you big bucks!
Now this deduction is one of IRS’ hotspots for audit because most business owners simply don’t take the time to learn the rules for this most beneficial deduction. Instead they make up numbers without reason and hope an pray they don’t get audited and have to prove these mysterious numbers.
I’m here to officially tell you wild guesses won’t work from now on. After you read this post you will have no more excuses as to why you don’t have the correct numbers to get this write off on your taxes next year. Right?
Now In order to take the mileage deduction you must keep track of certain types of mileage.
Business miles – these are the miles you drive for your business to client appointments or to run errands for the business, such as to the post office or to buy supplies.
Commuting miles – these are the miles to and from work. If you have a job these would be the miles to and from home and your workplace. If you own your own business and you rent/own/lease office space, these would be miles to and from home to that location.
Personal miles – these are every other mile driven outside of business and commuting miles.
As an added bonus, you can also track charitable and medical miles because they are also tax deductible.
Why must you keep track of all of these different types of mileage numbers you ask?
Well, if you are trying to get this auto deduction, you will need to know the business use percentage, as we use those numbers to calculate it.
There are two ways to calculate the auto deduction, and you will need the business use percentage to calculate and determine which method will yield the best result.
These two methods are the standard mileage rate and the actual expense deduction.
Standard Mileage Rate:
The standard mileage deduction is calculated using the current year’s published rate on the IRS’s website, which can be found here. This method takes the number of business miles and multiples it by the published rate. This is the simplest method and the method that usually yields the biggest deduction.
You cannot use the standard mileage rate if any of the following applies:
- You use the car for hire (such as a taxi).
- You use five or more cars at the same time (as in fleet operations).
- You claim depreciation or a section 179 deduction
- You are a rural mail carrier who receives a qualified reimbursement
Note: if you decide you want to use the standard mileage rate for a car you own, you must use this method in the first year the car is available for use in your business. Then, in later years, you can choose to switch it up and use either the standard mileage rate or the actual expense method. However, if you want to use the standard mileage rate for a car you are leasing, you must use it for the entire lease period, without switching to the actual method.
Actual Expense Method:
The actual expenses method is calculated with the actual amounts you have paid for the following items:
- Registration fees
- Repairs and maintenance (including oil changes and tire rotations)
- Inspection costs
- Interest only from a car payment
- Car lease payments
Now, remember that not 100% of these expenses are deductible. The total amount you paid for these items, multiplied by your business use percentage, is how your deduction is actually calculated.
You will also get a deduction for depreciation if you are using the actual expense method. Which kinda of feels like getting an extra gift for Christmas, because it is a deduction that you didn’t necessarily have to spend your cold, hard cash on. Basically, they take the cost of the vehicle and give you a deduction for that cost over 5 years. Sweet right?
However, there is a caveat. Your business use percentage can’t fall below 50% or you will have to give that deduction back (potentially meaning you could owe the IRS in a later year the amount you got as a deduction in a prior year) and you may have to recapture this deduction when/if you decide to sell the vehicle (again, meaning a payback to the IRS).
Business tolls and parking expenses are deductible no matter which method you choose.
Now, remember I mentioned earlier that auto deduction is one of the IRS’s hotspots for audit. That’s because most business owners don’t keep what they call a contemporaneous log. Basically, this means a daily log.
Not only must you have documentation identifying the year, make, and model of the vehicle, while also proving ownership and/or a lease, but you must also maintain a log keeping a detailed record of the following items:
- The date of your trip
- Your starting point
- Your destination
- The purpose of your trip
- Your vehicle’s starting mileage
- Your vehicle’s ending mileage
- Tolls or other trip-related costs
For the actual expense method you will also need to:
- Retain receipts and invoices for all expenses paid
- Establish the identity of the vehicle by which the expenses were incurred
And in order to claim depreciation, you will need:
- The date the vehicle was placed in service
- The original cost of the vehicle
- The cost of any improvements to the vehicle
Sounds like a lot doesn’t it?
Well, this is why the IRS knows they can get you because who is writing all this stuff down nowadays?
Most office supply stores sell auto-log books you can keep in the car to track all this information, but there are also mobile apps out there that you can use to track these details as well.
Stay tuned because in a few weeks there will be a Part 2 to this auto deduction series, outlining the apps that I use, like the best, and recommend.
Please note this post DOESN’T outline all of the rules of writing off auto and truck expenses, so I encourage you to either speak with a tax professional or read the official IRS guide which you can find here.
As a bare minimum, make sure you are writing down (or snapping a picture with your cell phone) your starting mileage at the beginning of the year and ending mileage on the last day of the year. At least this way you will have a starting and ending point if you ever have to recreate your records.
Stayed tuned for Part 2…