Some business owners and employees who must travel in the course of their jobs keep excellent records of business mileage. But if you don’t keep these records the right way, you can’t include the expense on your business taxes and you could miss out on a large tax deduction. Even worse, the Internal Revenue Service (IRS) may deny these mileage deductions if you can’t prove them.
The Two Ways to Keep Business Mileage Records
The Internal Revenue Service (IRS) has two different methods for deducting driving expenses. You can either deduct your actual expenses or use the IRS standard mileage rate, which is normally updated once a year. If you are using the standard allowance method, you’ll just have to show the mileage, date, and purpose of your trip. There are advantages and drawbacks to each method.
Deducting Actual Expenses
If you are using actual driving expenses, you’ll need to keep receipts for all driving expenses, including gas, maintenance, and insurance. In order to calculate your business expenses, you’ll need to know how many miles you drove, and how many miles you drove for business purposes. For example, if you drove a total of 24,000 miles in a year, and you can prove 18,000 of those miles were for business purposes, 75% of your driving expenses can be listed as a business expense. You would then multiply your total actual driving expenses by 75% to get the amount to use for the expense deduction.
Recording Business Mileage
To be able to deduct mileage, you must keep timely records showing how many miles you traveled, the destination, and the business purpose. The best way to do this is to use an “at-the-time” log. You will need four pieces of information for every business trip: the date, your odometer reading at the start and finish of the trip, and the purpose of your trip. Two ways to track mileage:
The Logbook method.A mileage app
If you use the logbook method, you’ll need to record the information about the trip at the time it happens and why you are traveling to this location. Write down the point at which you began driving there. Include the address or some information about your destination.There’s a common misconception that if you keep track of actual expenses, you don’t have to track mileage. But you can only deduct business expenses, so you’ll still have to track mileage to separate the business miles from the personal miles. For both tracking methods, the most important thing to remember is that you must be able to show that you recorded the information at the time of the trip. You can’t wait until the end of the tax year to catch up!
Using an App to Track Business Mileage
If you have a smartphone, you can download an app that will record your mileage for you. They’ll even separate your business miles from your personal miles. If you use the same vehicle for both business and personal use, you must also record your overall mileage at the beginning and end of the year.
Reporting Your Mileage on Your Business Tax Return
The next step is to include this information on your business tax return. The specific way you include this information is different depending on your business. Start keeping track of your expenses for business use of your car, even if you don’t think there will be many business trips. Getting into the habit in January is better than losing out next April. You should also know that employees cannot take driving expenses as a miscellaneous deduction on their tax returns.
