Estimated tax tip savings: If you drove 10,000 miles for business purposes over the past year and use the IRS mileage rate, you’re entitled to deduct $0.56 per mile, which would give you a $5,600 deduction. At a 28 percent tax rate, this could cut your taxes by $1,568.
Think of your car as a tax¬savings generator. Each time you crank up the engine and drive between business locations, you create tax deductions. This can add up to tens of thousands of dollars in deductions, just for going about your normal business routine.
Here’s the catch: unless you take the right steps to prove your vehicle usage, the IRS is not going to give you any of those nice tax benefits. This means that—just like with your car—you need to perform some yearly maintenance to make sure those tax deductions perform properly at the end of the year. Read on to find out the best—and easiest—way to create the proof you need to satisfy rigorous IRS requirements and cash in on your deductions.
Close Doesn’t Cut It
In a recent court case, Marcus Crawford tried to defend the more than $20,000 in vehicle deductions he racked up during his daily driving for business. Mr. Crawford was a salesman who drove much of the day to meet customers. To keep track of his vehicle expenses, he
- made notations of his destinations on his daily calendar and
- kept his gas receipts.
You might think that his records sound pretty good. Maybe they were good enough to get some deductions, if not all? Nope. The IRS rejected his records and so did the tax court. At the end of the day, Mr. Crawford got zero dollars in tax benefits, solely because he could not produce the right evidence.
We have to give Mr. Crawford some credit—he kept much better records than many of the taxpayers who end up in court. Unfortunately, with vehicle deductions, the IRS wants perfection. Pretty good is not enough
The Records You Need
The following two records will give you exactly what you need to meet the IRS requirements for vehicle operating cost deductions:
- A mileage log
- Receipts that corroborate your mileage log
The Perfect Mileage Log
A mileage log is a record that accounts for all the miles you drive and classifies the mileage into the following categories:
- Business mileage
- Rental property business mileage
- Investment mileage
- Personal mileage
- Commuting mileage
Take a look at this example:
This is the perfect mileage log. It allows you to record each trip, track the mileage, and note the purpose for driving. (To receive a free blank copy of the mileage log, ask us when you come in for tax appointment)
You may have noticed on the above mileage log that the stop for groceries has zero mileage. How is that possible?
In this example, the grocery stop occurred along the way between two business stops and therefore does not create any personal mileage.
Group stops for convenience. If you make multiple stops on a trip, you can write these stops in a single entry. For example, a real estate sales professional who shows one prospect six properties during one trip might make a single entry like “Showed Jim Smith six homes in the Wesley Heights section of Washington, DC.”
How Three Months Equals One Year
If keeping the mileage log does not sound like fun to you, there is good news. According to the IRS, you can keep the log for part of the year and use that sample to substantiate your business use for the entire year.
The IRS examples show two ways of doing this. You can keep the mileage log for either of the two following periods:
- One week every month (for example, the first week of every month)
- Three consecutive months
For most people, we recommend the three¬month method. If you use the one¬week¬a¬month method, you are more likely to forget to record your trips at some point during the year. That’s not good. As we mentioned above, the IRS does not accept “pretty good” when it comes to mileage logs.
The three¬month method allows you to get into the habit of entering information during each trip, and it gives you nine months of worry¬free drive time.
Note. The time period in which you maintain the log must be representative of your business use for the entire year. For example, if your business changes greatly from season to season, the threeconsecutive¬months method will not work. In that case, the one¬week¬a¬month method is a better choice.
Corroborate Your Log
The IRS is skeptical of records that you create yourself. Thus, you want to back up your mileage log with information from other sources to prove that your records are accurate. For example, in an audit, the IRS will ask for documents such as
- copies of repair receipts, inspection slips, and other records showing total mileage for the year;
- copies of your mileage log; and
- a copy of your appointment book or calendar of business activities for the year.
The IRS will cross¬reference these records and receipts to be sure they match. For example, if you have a gas receipt in Kansas City on a day when your mileage log says that you never left Topeka, this raises a red flag. In fact, this is a big reason why the IRS rejected Mr. Crawford’s records in the case we mentioned earlier in this article.
Receipts. If you use the actual expense method for vehicle deductions, your best practice is to keep copies of receipts for all expenses you will claim as deductions. For more on which receipts the IRS requires, see the article Ignore the Tax Code’s Rules on Receipts.
Apps, Phones, and the Modern Age
I know, I know. This is a mobile phone and digital world. So, is there an app for this? Yes. There are a number of apps available for this purpose, and some have excellent reviews. We have not used any of these apps extensively and cannot guarantee that they are problem¬free. If you use one of these apps, we recommend that you keep a paper backup of your mileage until you determine that the app meets all the IRS requirements as described above.
Driving during the workday gets a little more fun when you know that you are generating deductions for your business. As you saw from the example of Mr. Crawford, this could mean thousands of dollars of deductions simply for doing what you already do during your workday.
Unfortunately for Mr. Crawford, he did not take the time to make perfect records, and as a result he got zero benefit for his vehicle expenses. Don’t be like Mr. Crawford. Create a mileage log as we discussed in this article (or use an app that provides the same information) and use this record to safeguard your deductions.