Nearly everyday I get asked by Small Business Owners about their cars so I thought I would take a moment to talk a little about the best ways to deal with vehicle expenses. Actually, it is quite simple, there a (2) ways to handle it:
- Keep a mileage log
- or get audited.
I know that sounds severe, but I am exaggerating only a little.
Officially, you can either deduct your "actual expenses" (Repairs, Maintenance, car washes, oil changes, depreciation, parking, etc….) or you can deduct a "Standard Rate" (in 2007, that would be $.485 per mile). Generally (there are exceptions) you can choose whichever method that will provide you with the greater deduction for that year.
I have been offices where vehicle maintenance and gas expense receipts are more prevalent than staples and paper clips. The Business Owner might not know how much money they’ve made that month, but, by gosh, they’ll know how much they spent on vehicle expenses!
Which is absolutely useless if you don’t know how many miles you drove for business.
You should have the mileage as of the first and last day of your tax year. ( For most of us, it is January 1st and December 31st.)Then keep a log of your business miles. (FYI, commuting mileage isn’t ever deductible.)
Every tax computation involving vehicle expenses will include a process similar to the following example from my tax preparation software:
The "Business Use Percentage" is required before any "actual expenses" or "Standard Rate" evaluation can occur.
Your business mileage log needs to include the following:
- Date
- Starting Mileage
- Ending Mileage
- Purpose of Trip
- Destination
Many people use notebooks (in this age of the computer, a notebook and pen is still the most flexible interface) or their PDA. (I use SmartMileage for my mileages log.)
A mileage log is not optional.
If you want to deduct vehicle expenses, you will need a log. (Line 47a-b gets looked at by the IRS. See the image below.)
You’ll sleep better, and you won’t be wasting your efforts at keeping a whole bunch of receipts that we can’t use.