So you started your own small business and happen to be driving all over Timbuktu to meet with customers and get supplies. It is costing you time and money to drive to all of these places that are necessary for the business. But can you get a tax deduction to lower your taxes for these efforts? The answer is most likely YES!
However, there are some exceptions (it is the tax code after all!). The major one that most do not realize is commuting back and forth from your home to your place of work is not a tax deductible expenditure. Rather, it is deemed personal in nature by the IRS. I know this does not seem fair since you have to drive to work to make money in order to pay taxes but the IRS does actually have a somewhat legitimate reason for this. This rule is in place because if a business owner was allowed a tax deduction to commute back and forth from the office, it would put them at an unfair advantage over every employee in the U.S. As an employee, you do not get any tax benefit for the cost of driving back and forth to work. If a business owner was to get a deduction for this, the fear is that many people would try to find ways to not be an employee anymore so that they could get that deduction.
There are two different methodologies that generate tax deductions for qualifying travel. They both require you to track your business vs personal/commuting use miles for the entire year.
The first and easiest method is the “Standard Mileage Rate Method”. Under this method, you take the business miles driven and multiply it by the IRS standard rate for the applicable year (for 2017 it is 53.5 cents per mile). This rate is meant to cover all of the expenses related to the vehicle including gas, decrease in value or depreciation, and maintenance of the vehicle. This way you only have to track your business miles and not worry about all of the expenses that go along with it.
The second method for vehicle mileage is the “Actual Expense Method”. This method is much more accurate and will likely result in a deduction that more mirrors the actual costs. The tradeoff is the administrative effort involved: you have to keep track of all of your vehicle related expenses for the entire year (gas, maintenance, lease payments, garage rental, etc.) and multiply them by the percentage of business vs personal use for the year. If you choose this method, you will want to save receipts for all of these expenditures to support your calculation in the event of an audit. I am not sure how good your memory is, but I say I will remember something in a month or so and then completely forgot what it related to. Now try remembering something 2-3 years from now when you have an IRS or state auditor asking you detailed questions… My bet is your answers will not suffice/will be contradictory to others and you run the risk of the auditor deeming you have inadequate records and denying all of the deductions. Denying the possibility it will happen to you or playing the “audit lottery” are never viable plans.
One trick to cut down on administration is to dedicate one vehicle as your “work” vehicle. To the extent possible, use your spouse’s vehicle for all driving that is not business related. This way, you get the highest tax-deductible % for all of the expenditures relating to the one vehicle. I know this is easier said than done but in the long run it could potentially save you tax dollars as long as the scenario is correct.
Lastly, I can say that on more than one occasion, I have heard from clients that “the car salesman said I could get a tax deduction for “x” that would be better than “y” which is why I bought/leased this”. As a general rule, taking advice from someone directly profiting from the sale is never a good idea. A good recommendation before making any large business purchase or expenditure, whether vehicle, machinery, building or anything else – is to check with your accountant first. Your accountant should be able to ensure that you have all the facts to make the best decision for your situation – weighing tax, strategy and operational factors. The old adage of it is easier to ask forgiveness than permission does not fly with the IRS!