In today's business world, maximizing business profits is a focus for most owners. No matter how big or small your business is, it pays to be informed on how deductions are limited and the record keeping requirements to ensure they will be allowed at tax time.
For business use of auto or transportation, there are two formats: Standard Mileage Deduction and Actual Expense Deduction.
The Standard Mileage is calculated by using the IRS standard mileage rate which is updated on a calendar annual basis and can be found at www.irs.gov. This rate is then multiplied by the number of miles driven for business use.
Actual Costs Deductions include gas, oil, tolls, parking fees, insurance, repairs, registration costs, garage rent, tires, repairs, depreciation or lease payments.
The benefits of each type of vehicle write offs can vary depending on your total costs verses the amount of miles driven within a tax year. Both options are limited to the percentage of business use calculation if the vehicle is also used for personal travel. If you have low vehicle costs and high mileage, you may have a higher deduction by using the standard mileage reimbursement. If you have high vehicle costs and low mileage, the actual expense method may provide a higher deduction.
Other than the deduction calculations, there are some IRS regulations that need to be considered when choosing between these options.
⇒ Once you chose actual expense method and claim depreciation for the vehicle used for business, you cannot change back to the standard mileage reimbursement format for the life of the vehicle used in the business.
⇒ If a vehicle is owned by the Corporation/S-Corp, you can only use the actual expense calculation
⇒ Actual expense calculation is only allowed for the % of business use the vehicle is used for so these deductions can be limited if the vehicle is also used for personal use.
⇒ Selling or trading in a vehicle where the actual expense deduction for business use was allocated, can create a business taxable loss or gain calculation.
⇒ For standard mileage option, you may be able to change to the actual costs in future tax years.
For either Auto Expense method, appropriate record keeping is Essential!
Standard Mileage Recordkeeping:
Your mileage log must include the starting mileage on your vehicle's odometer at the beginning of the year and its ending mileage at the conclusion of the year. Each time you use your vehicle for business purposes, you must record the following information:
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
Note, mileage from your home to office is considered commuting and is not allowable. Mileage from your home to your first client appointment may also be limited unless you meet the home office distinctions.
Today’s technology has numerous tools that can assist you to maximize your Standard Mileage deductions. Mile IQ, Triplog, mile tracker are a few of the apps available for free.
Actual expense must have all receipts with itemized details of the expense (insurance policies, lease documents etc.) Accurate tracking for percentage of business use must also be maintained so tracking of mileage may still be required for this deduction. If a receipt is lost the IRS may disallow this expense during an audit.
IRS Publication 453 defines the guidelines on these and other transportation regulations in more detail.
At JK Bookkeeping we are happy to review and assist with calculating your auto expenses to help you determine the financial aspects of auto deductions for your business. Always consult with your tax preparer or CPA before choosing or changing the way you deduct for auto expense.
Experience Peace of mind with our Professional Bookkeeping Services.
Please contact us today to schedule a complimentary 30-minute consultation and learn more about how outsourcing to JK Bookkeeping can help your business. Your Success is Our Success!
