This One IRS Deduction Is Worth Thousands
Vehicles are well-known money eaters, and for many, it’s the second biggest expense. The good news is that vehicle expenses are deductible. Many freelancers sometimes find the tax rules a bit tricky, but well worth the effort.
Thousands Of Dollars Go Unclaimed
Accountants say most people fail to claim thousands of dollars in mileage and business expenses, but after pointing out how much this can boost refunds, taxpayers certainly want to learn more. One problem is that business expenses tend to be an audit magnet for the IRS. With that in mind, there are some basic rules to keep in mind.
Rule #1: Keep Excellent Documentation. You’ll need a trip or mileage log to record your vehicle use. This includes credit card statements, and gas and toll receipts. In order to use these business deductions, the IRS expects you to prove the numbers, just in case you’re ever audited. The IRS expects to see numbers like “72% business and 28% personal.” And you should be able to back up your data.
Individuals also have a choice of methods to write off vehicle expenses. Choose either the IRS standard mileage rate or the actual expenses. The actual method allows you to deduct all vehicle expenses according to your business use.
Rule #2: Allocated Your Business/Personal Usage. If you use your vehicle for both business and personal use, you’ll need to keep track of your personal use. And the IRS can be fanatical on this issue. For many people, it’s easier to track business miles, instead of personal miles. At tax time, simply subtracting the business miles from what shows on the speedometer is a easy workaround. However, even doing it this way can create chaos. One of the biggest advantages nowadays is using apps that can automate most of these tasks.
Standard Mileage Method
The absolute easiest method to deduct vehicle expenses is with the standard mileage method. At the end of the year, you simply add up all the business miles you’ve driven and multiply that number by the IRS mileage rate. This year, that rate is 54.5 cents per mile. You also get to deduct parking, tolls and other fees.
There are exceptions to using the standard mileage deduction. If you’ve used more than one vehicle for your business, or you depreciated the vehicle the year before. In these scenarios, it’s best to consult with an accountant.
Actual Expense Method
When using the actual expense method your record keeping must be detailed for all mileage and out-of-pocket expenses. You can deduct gas, insurance, maintenance, parking, tolls, and many more expenses, but you are also required to keep all receipts, as well as a log of all expenses.
No matter which method is used, it all comes down to accurate records, and this is the biggest problem people run into. One tip is to have the vehicle serviced at the beginning and ending of the year to prove total annual miles. It still will be necessary to keep car receipts and prove mileage, and even with a log book, it’s a lot of information, and a lot of writing. The best advice is to automate the record keeping and take advantage of today’s apps.
