Procedures for Tax Deduction of Auto Use for Business

Bad habits practiced too long become so deeply rooted that dislodging or altering them is nearly impossible. When the costs of lax routines are high, however, and money is being pointlessly squandered, wise entrepreneurs are motivated to adopt sensible procedures. An especially common area of sloppy practices is business use of a personal vehicle.

Required Records

The overarching rule for business use of a personal vehicle is that a contemporaneous written log is necessary. Failure to follow this mandate will doom an entrepreneur to missing deductible mileage expense and possibly having any tax benefit at all disallowed. Maintaining proper auto use records simply requires a glance at the odometer before and after driving for business.

When you simultaneously use multiple personal cars for business – or trade your old model for a newer one – you should have a mileage log for each vehicle. Document the date, place, and business nature of each trip along with the number of miles. Each log entry documents one uninterrupted trip. A single trip may consist of more than one business purpose. You don’t need to list the number of miles between multiple locations on the same excursion. You can even count a trip as entirely for business when it includes minimal personal use.

Better than Alternatives

Having the exact number of business miles creates the beauty of simplicity when determining the expense amount. Multiply the miles by a standard mileage rate to calculate your auto expense tax deduction. No need for tracking fuel and maintenance costs throughout the year. The mileage rate takes those into consideration along with wear of the vehicle.

Even if you did track actual operating costs for the car, you cannot deduct all of them as a business expense. You would still need the number of business miles and the total miles for all purposes. Only the percentage of business use times the actual vehicle operating costs is a business expense. You’re clearly not allowed to claim a business expense for the portion of vehicle operating costs that applies to personal use. Tracing all your fuel and auto maintenance is more burdensome than only keeping a mileage log.

Make It Accountable

The mileage log standard assures that you don’t guess at year-end how many business miles you drove. Guesses and estimates are poor ways to claim a business expense. Guessing typically results in underestimating the real number of business miles driven.

If you have other employees or your business is incorporated, a mileage log assures that the company is giving auto reimbursements under an accountable plan. Even if you are the only employee of a corporation you own, the accountable plan rules apply to you. Without an accountable plan, a corporation is required to report vehicle reimbursements as taxable compensation. The company incurs payroll taxes and the reimbursements are no longer tax-free to the recipient employee. As a solo employee of your own corporation, you’re stuck owing tax instead of getting a tax-deductible expense.

Do yourself a big favor by keeping a log in your personal vehicle for business miles driven. You’ll stop guessing, get the right expense amount, and have no worries about tax authorities questioning your deduction.


Leave a Reply

Fill in your details below or click an icon to log in: Logo

You are commenting using your account. Log Out /  Change )

Facebook photo

You are commenting using your Facebook account. Log Out /  Change )

Connecting to %s

%d bloggers like this: