As a busy CEO, you may spend a considerable amount of time on the road. Whether you're driving to client meetings, running errands, or commuting to the office, you are likely racking up a significant amount of mileage. But did you know that keeping track of your mileage is a necessary part of saving money on taxes? In order to deduct your vehicle expenses, the IRS expects you to track the business vs. personal mileage on your vehicle throughout the year.
Something that trips business owners up quite often is the concept of business expense vs. tax deduction. Sometimes the business incurs expenses that aren't considered deductible by the IRS. Vehicle expenses are one of the areas that can get muddy quickly if you're not keeping good records.
💰 Did you know that the miles spent commuting to your office aren't considered a deductible use of the vehicle?
When you are using a vehicle (or a fleet of them) in your business, it’s important to understand how to account for the expense. Well, the IRS has two options for you: (Found in publication 463)
The first option is actual expenses. Yep, it’s just what it sounds like. Track and record each expense related to running the vehicle, including:
gas,
repairs and maintenance,
insurance,
license,
tires,
car washes,
towing,
and, of course, depreciation.
If you need to catch up on depreciation, head over here. I’ll wait.
Ok, now...
Bookkeeping for these expenses is just like any other business expense. Keep your receipts and log them throughout the year in your bookkeeping software. At the end of the year, the total related to the business use (as determined by your mileage log) is counted as a deduction on your tax return.
Additionally, you’ll need to use a mileage log to record the business usage of the vehicle.
Best practice includes:
Date
Destination
Business Mileage
Business Purpose
It’s also a great idea to take a photo of the beginning and ending mileage of the vehicle for the year. A handy mileage app will do all of this for you easily. (I use MileIQ but there are many options available)
The second option allowed by the IRS is the vehicle mileage rate.
The IRS has a handy all-in-one rate that is extremely useful in certain situations, the most common of which is small business owners using their personal vehicles for business purposes. It’s calculated to include depreciation plus all the other *average* costs of vehicle maintenance on a per-mile basis.
The records requirement for using the mileage rate is a much lower bar which boils down to a meticulous mileage log. (No, really. The better your log, the less chance you’ll have audit issues) See the above requirements for the log.
To take this business expense, simply tally your business mileage for the year and multiply it by the rate to get your deduction.
So - the big question you are asking now is - How will you know which one to use?
Great bookkeeping, of course! The answer is in the numbers. As in, total up each set of numbers and see which one comes out as a higher deduction for your tax return.
IMPORTANT NOTE - if you don't track your mileage at all and get chosen as the lucky winner of an IRS audit, you risk having all the expenses disallowed completely.
So if you need help keeping track - I’m here for you. And when you come to my office, your mileage is tax deductible! 😉
REMEMBER - For analysis of your specific situation; please consult with an expert!
Together we'll get you heading in the right direction!
I'll never steer you wrong,
