Generally, when I’m filing a tax return for a business owner, I tend to use the mileage rate. For many of my clients, it’s the best deduction for them financially. For some of them, I use mileage because they don’t keep good enough records for me to use their actual expenses.
To be honest, I hadn’t really pushed the actual expense method much, but with gas prices creeping upwards of $4 a gallon and the IRS mileage rate at only 51 cents a mile, it’s time to rethink strategy. Remember, you never want to leave money that’s yours on the table for the IRS. If you want to claim your actual auto expenses for your business, there are some things you need to know.
First, whether you claim your mileage or your actual automobile expenses, you still need to keep records of your business mileage. A real common mistake people make is they think that they can hand over a bunch of receipts and claim their actual business auto expenses. It doesn’t quite work that way. You have to track your business versus your personal miles in order to determine a percentage. Let’s say you saved all of your receipts for your auto expenses and they totaled $5,000. It means absolutely nothing if you aren’t able to tell me how many miles you put on your car this year and how many of those miles were for business. Without the mileage information to go with it, the $5,000 in receipts is pretty worthless.
Now I’m quite certain that people “make up” their mileage all the time. But I also know, if you are selected for an audit and you have claimed auto expenses; I guarantee that your mileage log will be requested. I guarantee it.
So why set yourself up for losing an audit? Keep good records, and you’ll have nothing to worry about. What’s even better is that you may even find that you have a bigger deduction to claim than you would have had just by guessing at your miles. (True story, client got audited, had to recreate his mileage log. He used to lowball his mileage estimate to avoid an audit. He’d listen to what the other guys in the office claimed and lowered his a little to be “safe.” It didn’t work. Turns out he underreported by about 5,000 miles. That’s a $2500 deduction. In his tax bracket that was worth $625. Wouldn’t you like to have an extra $625? He’s my best record keeper now.)
So now you’ve got your mileage log and you’ve determined that exactly 25% of your miles are used for business. If we go back to the $5,000 of auto expenses you had, that would give you a deduction of $1,250. You’d check that against what your deduction would be for claiming straight mileage. As long as you claimed mileage the first year you put the car into service, you can switch back and forth between actual expenses and the mileage rate. If you started with actual expenses, you have to stay with actual expenses until you change vehicles.
So if you’re claiming actual auto expenses this year, what do you need to keep track of? Besides your mileage, you’ll want receipts for your gas, car washes, auto repairs, oil changes, tags, personal property taxes, and insurance. I can hear you thinking, “I don’t have receipts for my gas. It’s too late to start for this year.” Not really. One nice thing about auto expenses is you don’t actually have to have a receipt for anything under $75—you may have to start saving the gas receipts soon, but most of us can still fill up for under $75, just barely anyway. I always get my gas at the local shell station. I always pay with my debit card. I can go to my bank statement and tell you exactly how much money I spent in gas this year. Granted, I’m boring and predictable (I do taxes for a living, give me a break!) But I bet you can reconstruct your gasoline expenses too. And from here on out, you can keep better records. Please note–when I say you don’t need a receipt, that doesn’t mean you don’t need proof, you do need proof, you just don’t need to have the little printed receipt from the gas pump if the expense is under $75.
When you claim your actual expenses, you’ll also be claiming depreciation. There are special rules and regulations about the depreciation you can claim on luxury cars, but most software programs these days will tackle that for you. Remember that you’ll need information on the date your purchased the vehicle, the price you paid, and when you placed the car in service (using it for your business.) Because you kept track of your mileage, you’ll know your exact business use percentage to claim as well.
But what about your mileage? What if you haven’t been keeping records of that? Once again it’s not too late. In a perfect world, you have perfect records for the entire year. But, if you have consistent auto usage, you can keep good records for 90 days and use those records to extrapolate the mileage for your return. (Extrapolate is a pretty big word for the likes of me. It basically means that if you’ve got good records for 90 days, we can make a pretty good guess as to how you did the rest of the year.) A full year of tracking is better, of course, but the 90 day rule has been accepted by the IRS in audits before so it’s a workable documentation plan.
It’s really not too late to start tracking your actual auto expenses for your business. But don’t wait much longer or it will be.