When preparing your business income tax return, your tax preparer will need to calculate the deductible portion of your vehicle expenses, based on mileage information they ask you to provide. The IRS requires you to track your business miles throughout the year, and only allows expense deductions for the business use. The consequences of not doing this are potentially severe; if the IRS determines records are inadequate, the entire vehicle deduction for a tax year could be disallowed. There are two methods that can be utilized to calculate your business vehicle deduction: the actual expense method and the standard mileage deduction. The method chosen is per vehicle, and once chosen is generally used for the life of that vehicle. Please make sure you are doing the following to stay compliant:
- Tracking all business miles, with details for each vehicle (such as: 8/1/13 round trip from office to location X to meet with potential new client Y, total miles 8.5).
- If you claim business deductions based on actual expenses on your vehicle (rather than based on the standard mileage deduction), it is imperative that you track all expenses separately for each vehicle used for business purposes. In other words, you have a van used 100% for business, plus you also use your personal car 60% for business purposes, and you deduct expenses for both vehicles based on the actual expense method. Your books must show all expenses related to the use of each vehicle (gas, maintenance, insurance, etc), and it must show these expenses separately for the van than for the personal vehicle. If not, we don’t know what expenses to use to calculate your business deduction. If you don’t know whether you use the actual expense method or the mileage deduction for your vehicles, ask us!
Please note that commuting from your home or other non-work location to your office does not qualify as business use; this is commuting miles, which are not deductible. However, if you have an administrative office or other 100% business-use space in your home, and you drive to a permanent office or work location, these miles most likely do qualify as business mile.