If you have your own business and it requires driving, then read this. Even if you don’t have your own business but you drive your own car or truck for your job sometimes, read this too. There’s a way to recoup costs on your federal income tax return even if your employer won’t reimburse you.
Which Method Should You Use?
Basically there are two methods for claiming business travel expenses on your taxes: you can keep records of your related auto expenses and deduct that amount or you can use the IRS mileage rate.
If you are a small business owner you already have your plate full. Keeping track of expenses and storing all those receipts is a full time job in itself. The IRS mileage method is much easier because you don’t have to save your receipts. You simply keep track of the miles you drove. At the end of the year you multiply the number of miles by the IRS mileage rate and the result is your mileage tax deduction. Looks a bit like this:
miles driven x IRS mileage rate = your tax deduction
This is a very simple method compared with claiming actual expenses, since you don’t have to keep receipts and you perform only one simple calculation to arrive at the deduction amount.
The IRS Mileage Method Requires a Written Log
You do, however, need to keep track of how many miles you drove and time, place and reason for the driving. You are putting yourself at risk of failing an IRS audit if you do not keep what they call adequate records. Everyone is talking about the guy who lost his court case against the IRS because he didn’t keep records of his miles driven (well everyone in the tax world, anyway!).
This unfortunate man claimed a business deduction using the IRS mileage method. You see, the tax code has changed recently. Used to be, when someone claimed the business miles deduction and had no written log, and he got audited, the tax court would estimate the miles and that number would be used to calculate the deduction.
But now, in the case of the unlucky guy, this estimation technique is no longer valid. The court must see adequate records of the business miles driven. The taxpayer’s word is not enough. But the taxpayer’s written log is enough.
How to Keep a Written Log of Business Miles
First, here’s what the IRS wants to see if you claim the IRS mileage rate and they decide to audit you. They’ll want a written diary or log of each trip you took. It must include:
- number of miles driven
- date and time of the miles (e.g. trip started at 10am on May 11 and finished at noon)
- where you drove: from point A to point B*
- why you drove those miles: (e.g. drove to Mr. Smith’s house to perform a kitchen renovation estimate)
Now, there are two types of business miles you can drive. There is driving you do away from home, like a business trip where you have to stay in a hotel. Then there is driving you do around town after which you go home at the end of the day. The first is called travel away from home and the other is just called business mileage.
*For regular old business mileage you don’t need report #3 on the list. That’s place. Only if you are driving away from home to another city on a business trip, does the IRS care where you drove.