Likely you’ve already amassed the records needed for tax return preparation this year. Perhaps you’ve seen that there have been missed opportunities for greater tax savings because you didn’t have the necessary records to take what are otherwise legitimate write-offs. It’s not too late to take action now that will favorably impact your tax savings for 2016 and for years to come.
Recordkeeping requirements for business driving
Most small business owners use their personal vehicles for business driving. In fact, car and truck expenses combine to be the largest single deduction category for sole proprietors each year, greater than wages, rents, and other categories of deductible items.
The miles you drive your personal vehicle on business matters can really add up to a sizable write-off. Using the IRS standard mileage rate (57.5¢ per mile for 2015 driving; 54¢ per mile for 2016 driving) translates into a significant deduction. For example, if you drive just 5,000 miles for business in 2016 (20 miles a day, 5 days a week, 50 weeks a year), your deduction is $2,700.
However, you can only take this deduction if you have the records to support it. For example, Schedule C, the return filed by sole proprietors and independent contractors, asks: “Do you have evidence to support your deduction?” and “If “Yes,” is the evidence written?” Failing to check the yes boxes in response to these questions is an audit red flag.
Your records on business driving must reflect all of the following information:
- Date of each trip
- Business purpose
- Cost of expense (e.g., gas fill-up; oil change). This element is necessary only if you use the actual expense method to account for the cost of business driving; you don’t need it if you rely on the IRS standard mileage rate.
What’s more, the record of business driving must be prepared “contemporaneously.” The IRS says that a log prepared within a week of a drive is contemporaneous. A log prepared in anticipation of a trial in which the IRS contests a deduction for business driving is not contemporaneous.
For recordkeeping, you have two options: records on paper or electronic records. Paper records are fine (I did this for many years), but do require effort to record the mileage as well as the date, mileage, destination, and purpose of the trip.
Electronic records are easier (and obviously are contemporaneous with the driving). For example, I now use MileIQ, an app that works automatically by detecting your driving (much like FitBit knows your steps). At the end of each trip, you swipe left to indicate personal driving or left for business driving. The date of each trip, the mileage, and destination are automatically recorded; you can add more information (e.g., the business purpose) about each trip later on or right in the app as you swipe each drive. You can also note any parking and tolls, the cost of which is deductible on top of the standard mileage rate.
Scope of business driving
What constitutes business driving? This is important to know because failing to treat a trip as business-related when in fact it is for business costs you money.
Commuting to and from work is not deductible, even though you do it for business. However, if you have a home office for which you take a deduction, then there is no such thing as commuting. In this case, all driving to and from home on a business matter is deductible.
What is business-related driving? Here are some examples of business destinations:
- Attendance at courses, seminars, trade shows, and other information/education events
- Banks to make deposits, etc.
- Customers, clients, and patients
- FedEx and UPS to mail business packages
- Office supply stores to stock up on paper and other supplies
- U.S. Post Office to mail letters and packages. Some small businesses also maintain a post office box to receive mail, and trips to pick up deliveries here are for business.
- Vendors and suppliers
- Visits to advisors (e.g., attorneys, CPAs)
Tax savings results from better recordkeeping. Apps go a long way in simplifying the boring task of keeping track of your miles for business driving. Remember, the cost of any app you use for business is tax deductible!
I liked this app so much that I’m now working with MileIQ!
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