Small business owners may use their personal vehicles for business driving. This is perfectly advisable from a cost-saving perspective, and it’s permissible for tax purposes, too. The only catch is that in order to deduct the cost of driving a business, you need to substantiate the business’s use of the vehicle. The tax rules are very strict on what this means. There’s a right way and a wrong way to do it.
Records must be contemporaneous
This means required information must be noted in a logbook, app, or other record at or near the time of each business trip in the vehicle. In one case, a contractor created his mileage record solely for use when he was audited; the notations weren’t made contemporaneously with the business use of his Mercedes. What’s more, his record was a calendar with minimal notations about business appointments, which is not good enough, as you’ll see.
Required information
It is not enough to simply record the date and mileage for business travel for tax substantiation purposes. The IRS says you must also document:
- The date
- The destination (city, town, or area)
- The business purpose
- The odometer reading at the start and finish of each trip (total miles for the trip)
- The expenses should include the type (e.g., oil, gas) and the amount unless the IRS standard mileage rate is applied (explained below).
If you choose to deduct the IRS standard mileage rate instead of actual expenses, you still need to keep a record of all the information other than expenses. The standard mileage rate is 58.5¢ per mile for business driving during the first part of the year and 62.5¢ per mile during the latter part of the year. Again, using the standard mileage rate does not relieve you from the obligation of recording all other information about each business trip.
Sampling for recordkeeping
Instead of documenting information for every business trip in your vehicle, you can maintain a sufficient record for specific periods within a tax year and use that record to demonstrate the total business use for the entire year. This method is known as “sampling,” and you must ensure that the periods for which you keep adequate records accurately represent the overall usage throughout the tax year. For instance, if you drive a similar number of miles for business each month, recording detailed information for the first three months allows you to estimate your mileage for the entire year. Likewise, if you track your mileage for the first week of each month, those weekly records can be utilized to substantiate business driving for the month.
The IRS provides the following example: You use your car to visit client offices, meet with suppliers and subcontractors, and pick up and deliver items for clients. While there is no other business use for the car, you and your family also use it for personal purposes. You maintain thorough records during the first week of each month, demonstrating that 75% of the car’s use is for business purposes. Invoices and bills confirm that your business use remains consistent throughout the later weeks of each month. Your weekly records accurately represent the car’s usage each month and serve as adequate evidence substantiating business driving for the annual percentage of business use.
Documentary evidence for actual expenses
If you choose not to use the standard mileage rate to calculate your deduction for the cost of substantiating business driving and opt to deduct your actual expenses instead, you must retain receipts, canceled checks, credit card statements, bills, or other forms of documentation that support the costs associated with business use. This requirement is in addition to the mileage record and other information mentioned earlier.
Distinguish between business and personal driving
The expenses incurred for personal driving are not tax deductible. Commuting costs are considered nondeductible personal expenses. To accurately claim deductions, keep track of the miles traveled from your office to any location related to your business, such as visiting a customer or vendor, going to the bank or post office, or purchasing supplies. If you operate a home-based business, trips from your home to any business-related destination and back are also counted as business trips.
Conclusion
Be sure to note that only self-employed individuals can deduct the cost of business driving. Owners of corporations that are employees can’t deduct their costs on their personal returns but can arrange for reimbursement from their businesses using an accountable plan; this requires the same substantiation. Sure, it takes effort to maintain adequate records of business driving, but it’s worth it. Just figure that if you are a self-employed individual who drives 8,000 miles for business (assuming the same miles each month) and you use the IRS standard mileage rate, you can deduct $4,840. That’s not nothing.
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