How to Deduct Your Vehicle Expenses
This article has been excerpted from Taxpertise: The Complete Book of Dirty Little Secrets and Tax Deductions for Small Business the IRS Doesn't Want You To Know , available from Entrepreneurpress.com.
Dan, a new client, arrived at my office for his tax appointment. He had dutifully filled out the tax organizer I had mailed to him. His penmanship was like a draftsman's--perfectly aligned, square, and consistent.
I flipped to the first page of data. Dan had copied every figure from every box of his W-2 onto the organizer despite my telling him he needn't do that. Just give me the W-2; no need to do any copy work. And, like most tax pros, I prefer to work from the document itself. The numbers written onto an organizer could possibly be transposed or illegible. Hey, no problem. Lots of folks like to mark up the organizer; I just hate to see them go to all that extra work.
I flipped a few more pages and found that Dan has a side business as a computer consultant. He has a home office and travels quite a bit to his clients' places of business. I turned to the home office worksheet, and lo and behold, Dan had actually prorated his mortgage interest, insurance, property taxes, and utilities between personal and business use of the home. Poor guy. Another waste of time since the tax software does that for me automatically.
When I turned to the section regarding business use of the automobile, my eyes bugged out. You'd think I'd found a black widow squashed onto the page. What I saw was something I had never seen before and have not seen since: A complete six-page mileage log detailing to the tenth of a mile every destination by date for the entire year. Beside it was listed Dan's actual expenses, including gas, vehicle registration, repairs, insurance, and auto loan interest. He listed his grand total mileage, his commuting mileage, his personal mileage, and his business mileage.
It is rare for a client to list his automobile expenses because most clients don't track their costs during the year. Rare for a client to even know his total mileage. But to show every expense plus attach a mileage log with so much detail wasn't just rare--it was a once-in-a-lifetime event. With any other client, even the most anal retentive of the lot, the page is usually blank. And it's typically accompanied by this conversation:
Me: So, Bob, did you use the van this past year in your mobile repair business?
Me: So how many miles did you drive, Bob?
Bob [His head rears back and his eyes dart skyward as though the answer were inscribed on the ceiling. In fact, I think it would be great fun to take a marker and write "19,497" right up there above the client chairs.]: Uh, I don't know. Probably about the same as I did the year before. How many miles did I drive then? Whatever it was, add another thousand.
As if mileage inflation ran side by side with economic inflation. Dan was the client from heaven by comparison. All I could do was stare at the mileage log. Dan shifted in his seat and cleared his throat.
I finally picked up my jaw from the desktop and closed my mouth. Where did I put that box of gold stars? I wanted to offer Dan a job. What else do you do with someone like that? I mean, there would be no lost files, ever. Every client conversation would be documented in great detail. Every figure on a tax return would be backed up by tapes and logic and citations of tax code and photographs and schematics. He would be the perfect employee. I wouldn't have to spend years carrying on about the importance of documentation. He already got it.
It was either that or ask him what the hell is wrong with him. Find out if he was being treated for obsessive-compulsive disorder and, if so, did he remember to include a deduction for his meds?
I didn't do either. I simply prepared Dan's taxes and have enjoyed a smooth and steady business relationship with him ever since.
Naturally, Dan never got audited. So I never had the pleasure of making an IRS agent's eyes bug out the way mine did.
The funny thing is that what Dan brought me is exactly what the IRS wants. Or so then say. IRS regulations dictate that if you are using a vehicle for business purposes, you must keep a contemporaneous mileage log, which means you're supposed to mark down your mileage as it occurs. That's what Dan did. Dan and Dan alone in the entire country, in the entire universe, if in fact they have taxes on other planets.
The IRS can require us to keep logs all it wants. Just like our parents required us to make our beds and be home by ten and not hit our siblings. But let's get real. Dan is the only guy out there who does this. The rest of us don't have the time or inclination for this busywork. Like we're really going to stare at our odometers and mark down ".8" every time we have to run over to the office supply store. As small-business owners, we're spending our time changing hats and putting out fires. No time for crayons and clipboards. Sorry.
For that reason I will not lecture you about keeping a log. I know you won't do it. Even if you make it a New Year's resolution and you're gung ho, I'd bet you dollars to martinis that by January 15, you'll be off the wagon.
It's damn near impossible to keep up that good habit. Well, guess what? IRS agents are reasonable human beings and most of them agree with me---no one's going to keep a damn log. Every IRS agent I've dealt with over the past 25 years, even the most hard-boiled of the lot, the ones who have the look of disdain down pat, the perfected eye roll, the smug eyebrow raise, even they have agreed to allow reconstructed logs.
Unless you're Dan, here's what you should do: First off, even a reconstructed log needs a starting point. It's very simple. Write your beginning odometer reading in your appointment book on January 1, and in bright red, mark "odometer:" on the December 31 page so you remember to record the ending reading at year-end. Now subtract one number from the other to find out your total mileage. It looks so much more believable and accurate to see 14,823 on the tax return under total mileage than it does to see 15,000, which is a dead giveaway that the student hasn't done her homework.
Try as much as possible to note all business meetings, errands, and other business vehicle travel in your appointment book. In fact, if you can do it, track both business and personal miles for a two-week period every quarter. Keep the info in your tax file for use at year-end to determine the ratio of business versus personal use.
Provide the total mileage figure and business mileage to your tax pro.
Some people think they can get away with writing off 100 percent of their only vehicle for business. All they are doing is tempting fate. Bob is one of those. Remember him from a couple of pages ago? He's such a bad boy; he keeps no records. Here's the rest of our conversation:
Me: OK, Bob. So how much of the mileage would you say is personal?
Bob: Oh, I don't have any personal mileage at all.
Me: But Bob, you don't have another vehicle.
Bob: Oh I know. But all my miles are all business.
Me [Heavy sigh.] We go through this every year.]: But Bob, you certainly must go to the grocery store or have a girlfriend somewhere.
Bob: I do grocery shopping on the way home. And my girlfriend Susie? She does all the estimates and paperwork.
Me [eye roll]: Right. What about weekends? Don't you have 49ers season tickets?
Bob: Yep, but that's a business expense, too.
Me: OK, Bob, whatever. Fine.
Bob thinks I'm going to give him 100 percent. But he's wrong. I know that old van is not 100 percent business use. So I knock off some points when he isn't looking and figure we're pretty square with the IRS.
So what is business mileage? First of all, you cannot deduct commuting. So forget about driving from home to your primary business location or from home to your first client. An exception is if you are self-employed and have a qualified home office. Your commute would be defined as travel down the hall or through the yard to the space that serves as your office. Once you are in the office, then every destination to which you travel to carry on business is considered business mileage.
See the logic? After all, if you have a regular job, you never deduct your commuting mileage against your W-2 wages. Once you get to work, if your boss requires that you use your vehicle for business travel, mileage for which you are not reimbursed is deductible.
You may also deduct travel between jobs. If you have two employers, you can deduct the mileage for travel from job No. 1 to job No. 2. Just don't stop at home first. That will blow the deduction out of the water.
I often walk from my home office to the post office and sometimes to nearby client offices. On one such walk, I wondered how audacious it would be to write off my shoes. Maybe I'd have to keep pedometer readings in my appointment book to substantiate business use. Hey, why not? I bet, however, that my Manolo Blahniks wouldn't be considered an ordinary and necessary business expense. The IRS would likely reduce that write-off to what one would spend for a pair of hiking boots, if they allowed the deduction at all. I can hear the auditor now: "You of all people should know better."
If your vehicle is used 100 percent for business--say it's a utility truck, a dump truck, a delivery vehicle, or a second vehicle devoted to business--and there's no personal use, you must still keep a mileage log.
To determine the business-use percentage for a mixed-use vehicle, divide the business miles by the total miles driven, for example, 7,000 (business miles)/10,000 (total miles) = .70, or 70 percent.
Now that we've established the percentage of business use and the total miles and business miles driven, let's put them to use. You need to determine if you are going to use the IRS standard mileage rate or actual costs.
You cannot use the standard mileage rate if:
- your business provides cars for hire (limo service, taxi, etc.);
- you have a business that has five or more vehicles being operated at the same time;
- you are a rural mail carrier who has a qualified reimbursement plan; or
- you are using an employer-provided vehicle.
If you wish to claim actual expenses, you can deduct gasoline, repairs, and maintenance (don't forget car washes), vehicle registration fees, insurance, tires, car loan interest, lease payments, garage rent, parking, tolls, and of course depreciation, including the Section 179 deduction. Don't forget to deduct the cost of those scented Christmas trees you hang from the rearview mirror.
Fill in the proper boxes on Form 2106 or on page 2 of Schedule C to take the deduction. If you are depreciating your vehicle, include Form 4562, Depreciation. Make sure you keep all documentation concerning this deduction in your tax file in case of audit.
And if you are audited and don't have your paperwork together, don't panic. Let me show you how understanding the folks at the IRS can be. A couple of years ago a new client, Spencer, came to see me. The IRS was in the middle of auditing three years of tax returns and was considering throwing Spencer in jail for tax fraud. And believe me it had a case; the tax returns he filed were as phony as Monopoly money. My firm compiled his books and created proper tax returns and a stay-out-of-jail card.
The auditor disallowed the vehicle deduction because Spencer hadn't maintained a mileage log. I got to work and reconstructed a mileage log based on Spencer's job files and a little help from Mapquest. The results proved his vehicle expense actually exceeded the amount he had claimed. He had likely paid cash for many of his gasoline purchases but had no receipts. I was excited!
But the auditor would not acquiesce. She had the right to deny the deduction because he did not keep a contemporaneous record. I argued that most auditors understand and accept reconstructed records, even reasonable estimates. "Oh c'mon," I said, "He's a contractor. He's got a truck. I mean, duh, he's got vehicle expense. You should allow something. It's only fair."
Finally, the reason for her stubbornness was revealed. The auditor uses her own vehicle and is forced to keep a mileage log so the IRS will reimburse her. And by golly, if she has to keep a log, then everybody else has to. Well, I finally wore her down and she accepted the reconstructed log and 100 percent of the deduction.
I know I have just relieved your mind. However, I'm not going to let you rest easy. Even though my clients and I have had good experiences dealing with the IRS when it comes to vehicle expense, bear in mind that the IRS does not have to accept reconstructed logs. And in our current political climate, when more tax revenues are required to pay for ever increasing government spending, economic bailouts, wars, and such, the IRS may decide to become stricter. You may find yourself walking out of an audit with a big tax bill because you didn't keep a mileage log.
So go clean your room, quit hitting your sister, and at least mark your annual beginning and ending odometer readings in your appointment book.
Bonnie Lee is the founder of Taxpertise located in Sonoma, Calif., a firm providing bookkeeping, payroll services, QuickBooks Training, income tax preparation and tax problem resolution including audits, offers in compromise and other representation issues. She is also the author of Taxpertise: The Complete Book of Dirty Little Secrets and Tax Deductions for Small Business the IRS Doesn’t Want You to Know (Entrepreneur Press, 2009).