What Do You Need To Know About Mileage Deductions?

There are numerous things that you should know about mileage deduction if you regularly drive your vehicle for business purposes.

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Understanding the tricks to employ around mileage deductions to get tax advantages for your vehicle operating expenses is an important business skill to have.

For example, there are tax advantages in buying or leasing a car.

Below are some of those things that every business owner should know.

1. The Method to Use for Deductions

The IRS prescribes two methods of mileage deduction.

  • The first one is called the Actual Expenses method which entails listing all the cost of operating a motor vehicle and then claiming them at the end of the tax year.
  • The second method is called the Standard Mileage Rate which is a rate that is computed by the IRS after putting into consideration the prevailing economic conditions and the expenses of running a vehicle.

This chart breaks your total business expenses (using a rideshare driver as an example) into two main groups:

  1. Common operating expenses and
  2. Vehicle expenses
Vehicle expenses breakdown
Source: https://turbotax.intuit.com

2. The Ownership of the Vehicle

You should determine who between the employee and the business should be the owner of the vehicle. You should always choose the one that gives you the most tax benefits through mileage deductions.

Your decision to lease or to buy the vehicle should be based on the tax advantages that you are going to derive on either of the two methods of car ownership.

3. What the IRS Consider a Business Vehicle

The IRS has some rules that every vehicle must satisfy to be viewed as a business vehicle for mileage deduction purposes.

Examples of business vehicles that have satisfied the IRS rules include SUVs, pickup trucks, and cars that are used for business purposes.

Your vehicle will not qualify to be viewed as a business vehicle by the IRS if:

  • You use the car as equipment, e.g. the dump trucks
  • You use the car for hire services such as taxi cabs and airport transport vans.

Congress has legislated on how the American taxpayers should subsidise for extravagant cars.

Namely, vehicles such as Ferrari and Rolls Royce do not even feature in the Congress view of expensive vehicles. They are way out of range.

For example, in the year 2017, the maximum depreciation write-off for new cars was $8,000 while that of used cars was $3,160.

The Congress is a little bit lenient on business-centric vehicles such as SUVs that have a payload of 6,000 pounds and above.

For example:

  • 50% of the total cost of an SUV can be expensed through the provisions of section 179
  • Another 50% can be expensed through bonus depreciation
  • Another 20% can be expensed through the first-year depreciation

What this means is that for an SUV whose cost is $50,000, at least $40,000 can be written off.

4. Maintaining Good Records

The IRS is almost paranoid about its requirement for proper documentation for mileage deductions. You will need a detailed log of all your business and personal miles for you to be able to claim mileage.

A smart technology such as a mileage tracking app will enable you to have records that will not attract IRS audits.

So, use GOFAR to log your business miles properly with no hassle.

What’s more, the app will help you to:

  • Get engine faults and explain them to you in plain English
  • Automate your mileage log book and business expenses
  • Teach you how to drive smarter and spend up to 30% less on petrol
  • Give you an easy to install a free app that needs no extra tools to function
  • Connect you with the best mechanics and parts suppliers in your area.

5. The Advantages of Standard Mileage Rate over Actual Expenses

Before you decide which right to use for your mileage deductions, you need to understand the following rule.

The cheaper it is to operate your car, the more likely that the Standard Mileage Rate will give you a higher tax incentive.

Contrastingly, the higher the expenses of running your car, the better it will be to use the Actual Expenses method to get better mileage deduction.

The rule is potent because, with the Standard Mileage Rate, the IRS will usually put into consideration all the expenses that you will incur before it is computed.

Therefore, if the cost of running your car is not high, you are likely to benefit from the red because it put into consideration the average rate of operating a vehicle in the country.

However, if the cost of operating your car is above the country average, you are better off using the Actual Expenses method because in such cases you will be able to deduct all the expenses that you have incurred when running the vehicle.

In 2018, the IRS has allowed both employees and individual self-employed people to use the Standard Mileage Rate to calculate the cost of running a car and then deduct it against their tax.

The rate is 55.5 cents per mile driven for business.

For you to use the rate, you will need to log the total miles driven during the year and the total miles explicitly driven for business purposes.

Examples of miles that will be driven for business purposes include supply runs, visiting the bank, meeting a client or a vendor or a lawyer, getting the office supply etc.

Miles driven but which are not business-related include driving from home to the workplace and back, stopping on the way home while coming from a business trip etc.

Examples of Actual Expenses of Running a Vehicle that is 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

6. Implications of Depreciation on Mileage Deductions

Vehicle depreciation is the amount that you subtract from the original value of the vehicle. Depreciation occurs as a result of general wear and tear.

The Standard Mileage Rate accounts for the depreciation within the rate.

Contrastingly, the Actual Expenses method will require you to calculate the depreciation of the car and then set it off against the tax.

You should choose the depreciation method that leaves you with the best tax advantage.

7. Whether to Buy or Lease a Vehicle

Your choice of buying or leasing a vehicle should also depend on your selected depreciation method. Here’s what you need to know:

  • If you choose to use the Standard Mileage Rate to calculate your mileage deduction, you CANNOT change to the Actual Expenses method later.
  • Again, if you use the Standard Mileage Rate on a listed vehicle, the lease payment fee is NOT an allowable deduction.
  • Lease vehicles should never be depreciated because the business portion of the lease payment is deducted instead.

In short, even if you already know all about mileage deductions, no matter what you decide – to buy or lease the car and whichever IRS mileage deduction method you find best for yourself, you still need to keep neat records, right?

Getting a handy mileage tracker will undoubtedly make your life much easier at tax time.

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