All You Need to Know About Mileage Deductions

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If you regularly use a vehicle in your small business, you need to learn how to deduct the expenses you incur for running the vehicle.

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Understanding the tricks around mileage deduction, the tax advantages of buying versus leasing and the tax implications of depreciation of the vehicles is important for any business owner.

Some Pertinent Questions to Ask Yourself about Mileage Deduction

Which Deduction Method Should I Use?

There are two methods of mileage deduction that you can apply namely;

  • actual expense method
  • and the standard mileage rate

You should consider the one that saves you the most tax burden. Use a mileage tracker to record your business expenses accurately.

Who Should Own the Vehicle?

You will need to decide who between the business and the employee should own the vehicle. Choose the one that gives you the most tax benefits.

Should You Lease or Buy?

Again, this will be determined by the option that gives the business the most tax advantages.

Which are the Business Vehicles?

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For a vehicle to qualify as a business vehicle, it must satisfy the Internal Revenue Service rules.

Business vehicles include SUV’s, cars, and pick-up trucks that are used for business activities. However, your vehicle does not qualify as a business vehicle if;

  • It is used as equipment, e.g. the dump trucks
  • It is used for hire services, e.g. airport transport vans and taxi cabs

The United States Congress has limited how far the taxpayers should subsidise extravagant cars. And in this case, Rolls Royce and Ferrari do not even feature. The Congress has an even less extravagant view of luxury.

For example, in the year 2017, the maximum depreciation write-off for new cars was $8000 while that of used cars was $3160.

For more business-centric vehicles such as SUVs that have a payload of 6,000 pounds, the Congress is very lenient.

  • 50% of the cost can be expensed through the provisions of Section 179
  • Another 50% can be expensed using bonus depreciation
  • Another 20% can be expensed using the first year depreciation

Therefore, for an SUV costing $50,000, about $40,000 can be written off.

Maintain Good Records

The IRS is very particular in their requirement for proper documentation when writing off the cost of running a vehicle. You need to have a detailed log of all your business miles.

The best way to keep a good record is to use a smart technology such as GOFAR to track and log your mileage.

GOFAR helps you to find your car engine’s sweet spot and then guides you on driving efficiently to save fuel and reduce wear on your brakes.

Other areas where the GOFAR app and device can help you include;

  • Tracking the car mileage for tax deductions
  • Alerting you when the car has a fault
  • Explaining the car faults in plain English
  • Reminding the driver of Registration & Insurance
  • Connecting drivers to top-rated mechanics and parts suppliers
  • Saving fuel by finding the engine’s sweet spot

Standard Mileage Rate versus Actual Expenses

As a rule, the cheaper it is to operate your car, the more likely the Standard Mileage Rate will give you a better tax incentive.

On the other hand, if your vehicle is expensive to run, it is better to use the actual expense method to get a bigger deduction.

Standard Mileage Rate (SMR):

The IRS has allowed both self-employed individuals and employees to use the SMR to offset the cost of running a vehicle for business purposes against their tax.

In 2018, the rate is 54.5 cents per mile driven for business.

You will need to have two mileage logs namely;

  • Total miles driven in the fiscal year
  • Total miles driven specifically for business

Examples of miles driven for business include;

  • Supply runs
  • Visiting the bank
  • Meeting with a client, vendor or lawyer
  • Getting office supply

Examples of miles driven but are not business-related include;

  • Driving from home to workplace and back. This is known as commuting and is not deductible on either individual tax returns or business returns
  • If you are coming from a business trip and stop on the way home, the remainder of the distance is considered commuting and is not deductible.

Examples of Actual Expenses of Running a Vehicle that are incorporated in the SMR

Gas and oil Maintenance and repairs
Tires replacement Registration fees and taxes
Licenses Loan interest
Insurance Rental/lease repayments
Depreciation Garage rent
Tolls Parking fees

Depreciation

Depreciation is the amount that you deduct from the original value of the vehicle, usually for general wear and tear. The SMR accounts for the depreciation. It keeps reducing the adjusted basis as the vehicle ages.

Vehicle Ownership

Self-employed owner

The owner is at liberty to choose whether to use the actual expense or standard mileage rate for the deductions.

If the employee uses the vehicle for business purposes, the employer is supposed to reimburse him the cost incurred at the standard rate.

The vehicle expenses will be an allowable deduction for the employer, and the properly recorded miles are not taxable on the employee.

For tax purposes, a single member LLC can file the tax return under Schedule C to be considered a self-employed owner.

Corporation

Depending on the owner of a vehicle used for business, the method of claiming deduction will differ. A vehicle can be owned by the corporation, a shareholder or an employee.

Each of these types of ownership requires a different method of claiming mileage

Vehicle owned by the employee – By documenting the business miles properly, an employee can ask for reimbursement from the employer, the corporation, through its accounting department will reimburse the employee using the standard rate.

The corporation will in return get a deduction for all the vehicle expenses it reimburses the employee when it files its returns.

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Before 2018, the employee would claim for unreimbursed amounts as miscellaneous deduction using Schedule A of Form 1040.

However, for tax years after 2017, you are expected to ask your employer for all the unreimbursed rates as any unreimbursed expenses are not allowable.

Vehicle owned by the corporation – A corporation is better off using the actual expense method of deducting the mileage. It is bound by the business-use percentages as prescribed by the IRS.

The corporation can treat all its expenses as allowable deductions as long as the personal use is treated as taxable income for the employee. This is especially common when an employee is given a company car for personal use.

Partnership/LLC

A partner or a member with unreimbursed deduction can place a claim for the deduction under the Schedule E of Form 1040 instead of using Schedule A.

Other rules of mileage claims work the same as the ones for a corporation.

To eliminate the need for cumbersome record keeping, it is much easier for an employee to use his/her personal vehicle for business drives and then submit the business expense reimbursement request rather than give an employee, shareholder or partner the company vehicle.

No matter the business reporting style you adopt, you will have to track the mileage log.

Vehicle Buying Versus Leasing

You can apply the standard mileage rate to calculate the allowable mileage deduction on a leased vehicle. If you choose the SMR, you cannot change to the actual expense method later.

Also, if you use SMR on a leased vehicle, the lease payment fee is not an allowed deduction.

Lease vehicles are never depreciated. The business portion of the lease payment amount is deducted instead.

In conclusion:

  • Always have the details of your personal and business mileage
  • Use the standard mileage rate to determine your deductions when you travel for business a lot but have few expenses
  • Use the Actual expense method to determine your deductions if you incur a lot of expenses driving for business
  • Any business use expenses is a legitimate allowable expense
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