During tax time, we often get the question from employees and business owners about how much of their auto mileage they can deduct on their tax return. This is one of the biggest questions where a slippery slope can occur without approaching this topic in the right manner. For most people including business owners, their automobile is not used 100% for business purposes. Thus, if you use the car for both business and personal purposes, you can only deduct the mileage related to the business portion of using the car. Here are some 'your smart money moves' guidelines when thinking about how much of your mileage you can deduct on your tax return.
You can generally figure the amount of your deductible car expense by using one of two methods: the standard mileage rate method or the actual expense method. If you qualify to use both methods, you may want to figure your deduction both ways before choosing a method to see which one gives you a larger deduction. (source: irs.gov) For most of you the standard mileage method is what you will probably use this year. For 2014, the rate is 56 cents on the mile. Don't forget that you may also be able to deduct certain mileage for charitable contributions (14 cents) and for medical expenses (23.5 cents).
The major mistake many people make when it comes to mileage is using the 'guesstimate' method which won't fly if you get audited by the IRS. This is the situation where an owner or a salesperson drive 15,000 miles per year and guesses that they use the car about 50% of the time for business purposes. Thus, they say that they drove 7,500 miles during the year and will get a tax deduction of (7,500*.56) on their tax return. The problem is without proper documentation and logging of the specifics around these miles, you simply won't pass the smell test when it comes to an audit.
The best way about logging these miles is to keep some type of daily record within your calendar, an excel spreadsheet, or even a notebook. You must keep a record of your mileage, your dates of your business trips, the places you drove for your business trips, and the people and purpose of your business trips. Do you notice a recurring them here in my suggestions? The key is documentation. The more detailed your records and notes, the better of a change your mileage records have for holding water. Remember, that the commute to and from your home to work NEVER count in the mileage deduction process.
People will often ask at what percentage of business miles vs. personal miles will end up triggering an audit. A CPA may be able to answer this question although I have never found a particularly good guideline. Some business owners do in fact use their car 100% for business. At the end of the day on this one, you will be able to deduct as much of your mileage as you can prove that you were involved in business related activities. Keep good documentation and consider using an app like MileIQ, Mileage Log+, Tax Mileage, or Trip Log. This tax save could be the shortest point between point A and point B if your records are in good order!
Written by: Ted Jenkin
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