When a taxpayer purchases a vehicle for business use there are a number of important considerations to maximize deductions and tax benefit. First and foremost, the IRS allows two different methods for calculating the deduction for using vehicles within your business:
- The Actual Expense Method
- The Standard Mileage Method
The choice of method is very important as it can produce significantly different results. Typically, the best way to compare is to calculate the deduction using both methods in the first year you utilize the vehicle for business. We at Newburg & Company, LLP can help you with this analysis.
THE STANDARD MILEAGE METHOD
The standard mileage method is often considered a simpler way of calculating the deduction for business use of a vehicle. With this method, the taxpayer does not have to maintain receipts or closely track expenses related to the auto. Instead, the taxpayer tracks all miles driven for business purposes.
General Rule
In order to claim a deduction for business use of a car or truck, a taxpayer must have ordinary and necessary costs related to one or more of the following:
- Traveling from one work location to another work location within the taxpayer’s tax home area
- Visiting customers or other travel connected with necessary job functions
- Attending a business meeting away from the regular workplace
It should also be noted that mileage related to a taxpayer’s regular commute is not deductible.
To calculate the deduction using this method, the total amount of business miles driven during the year is multiplied by the standard mileage rate. For 2018, the standard mileage rate is 54.5 cents. By way of example, if a taxpayer had 10,000 of business mileage during 2018 he/she would receive a deduction of $5,450 on his/her 2018 tax return.
THE ACTUAL EXPENSE METHOD
The actual expense method is calculated using the actual vehicle expense paid by the taxpayer during the year. Here are some of the major costs included in actual expenses:
- Gasoline
- Vehicle maintenance
- Purchase of new tires
- Lease payments
- Vehicle depreciation (special IRS limits often apply)
- Vehicle excise taxes
- Title, licensing, registration fees
These expenses are combined for the year and multiplied by the business use percentage of the vehicle. This business use percentage is usually maintained by a mileage log which documents all business miles driven during the year. Business miles driven is compared to total miles driven to obtain the percentage.
RECORDKEEPING AND SUBSTANTIATION
The IRS has put additional emphasis on substantiation of vehicle deductions. Lack of adequate records and records reconstructed from invoices and other sources, after the fact, have been disallowed in their entirety. The use of reasonable estimates is not sufficient to stand up to an IRS challenge. The IRS requires substantiation of all travel deductions. To claim this deduction, the IRS requires the maintenance of a daily log outlining miles traveled, destination and business purpose.
Whether you use the standard mileage method or the actual method, a mileage log is very important to substantiate the deduction. We recommend the use of a formal mileage log book or use of an online calendar where the taxpayer enters the travel details and business purpose. You can print your online calendar monthly and tuck this away in a file in case your are ever audited. If manual recordkeeping seems too burdensome, there are also a variety of mobile apps (MileIQ, Triplog, TaxMileage, etc.) that can assist you with tracking and substantiation. We have included an example below of an excerpt from an appropriate mileage log.
| Log: | ||||||||
| Date | Time | Desc | Purpose | From | To | Odometer Start | Finish | Miles |
| 3/15 | 1:30pm | Prospect: J.Smith | Client Dev | Waltham | Boston | 33,389.1 | 33,521.4 | 32.3 |
| 4/14 | 6:00pm | Seminar: P&C | Bus Educ | Waltham | Boston | 34,489.8 | 34,522.1 | 32.3 |