To claim deductions and credits for the business expenses you incur, you must have certain records, including the amount of your outlays. Without good records, you can miss out on otherwise legitimate tax write-offs. The IRS has created certain tools you can use to avoid the need to retain receipts and other records of costs. Here are some of these options to consider:
Standard mileage rate
To deduct the annual business use of your vehicle, you can keep track of expenses or use an IRS-set standard mileage rate. This rate takes the place of gas and oil, repairs and tires, and depreciation if you own the vehicle or lease payments if you lease it. Whether you deduct actual expenses or use the standard mileage rate, you can also deduct parking and tolls, assuming you have the records to prove your costs.
The standard mileage rate for 2023 is 65.5¢ per mile. There is no dollar limit on the total deduction, so if you drive your pickup for 20,000 miles in 2023, your deduction using the standard mileage rate is $13,100 (20,000 x 65.5¢). The 2024 rate won’t be announced until later this year (last year the rate for 2023 was announced on December 29, 2022).
If you want to use the standard mileage rate for a vehicle you own, you must choose to use it in the first year of its business use. Then, in later years, you can choose to use either the standard mileage rate or actual expenses. If you want to use the standard mileage rate for a leased, you must use it for the entire lease period.
Interest on vehicle loans is not factored into the standard mileage rate. The interest may or may not be deductible: yes if paid by a company or a self-employed individual; no if paid by an employee (it’s nondeductible personal interest in this case).
You can learn more about the standard mileage rate in IRS Publication 463 (it reflects the 2022 rate but the rules related to it are unchanged for 2023 and probably for 2024).
Home office simplified method
If you use a home office for business and meet certain tests, you can deduct the actual expenses for that business space or use the IRS-created simplified method. Under the simplified method, the deduction is $5/sq. ft. up to 300 sq. ft. for a maximum deduction of $1,500. This rate has not been changed since it was announced in 2013.
Schedule C filers can use a worksheet in the instructions to the schedule to figure the deduction under the simplified method.
Rates for business travel
If you travel for business, you can deduct your actual expenses or use certain standard rates:
- Federal per diem rates. These rates set by the General Services Administration (GSA) cover the cost of lodging, meals, and incidental expenses. The rates run for the government’s fiscal year starting October 1. Check the rates here.
- IRS high-low rates. These rates also cover the cost of lodging, meals, and incidental expenses and run on the government’s fiscal year. The rates for FY 2023 are in Notice 2022-44; the rates for FY 2024 are in Notice 2023-68. Special rates apply for those in the transportation industry.
- The 50% limit for meal costs also applies when using the federal per diem or IRS high-low rates.
- Self-employed individuals cannot use these rates for their lodging costs; they can use them for meals.
Using standard rates to reimburse employees
Mileage rates for vehicle use and federal per diem or IRS hi-low rates for travel can be the basis for reimbursing employees while simplifying their necessary recordkeeping. It’s advisable to be sure that reimbursements are done under an accountable plan so they are not income to employees nor subject to employment taxes. Find details about accountable plans in IRS Publication 463.
Note: If you use the rates for business travel, which run on the government’s fiscal year, you can opt to use the rates for the first 9 months of the year for the full year for your calendar year; you don’t have to switch to the new rates unless you want to.
Recordkeeping for taxes can be a daunting task, albeit simplified by the many apps available today. Still, using IRS-set rates can be just one thing less to worry about. More details, recordkeeping, and relief on recordkeeping for tax purposes are covered in my book J.K. Lasser’s Small Business Taxes. The 2024 edition for 2023 taxes is set to be released on November 30, 2023.
Read more ways to manage your business expenses in some earlier blogs here.