Going far to meet clients and vendors can be a lot of work, and the car miles add up fast as does the cost. When you see the empty tank in your car, the frustration starts to fill in your head. But, there’s some good news here; you can deduct car mileage for tax purposes under the specific conditions (Which we will explore in the blog). If you use a vehicle for small business purposes, you can definitely qualify for a business mileage deduction from the IRS.
Please understand that, take it as a disclaimer that not everyone can benefit from this, but worth looking into as it certainly adds up to substantial savings off taxes.
You might be thinking that a business mileage deduction is only going to save some fraction of the amount. But, trust us when we say this, you could end up with a huge tax break and there’s so much more to know about claiming mileage on taxes. We will share all that information with you on whom you can take a deduction for mileage, the deductible mileage rates, how you take the mileage deduction for taxes, business reimbursement of mileage, and several other frequently asked questions that surround the business mileage deduction on taxes.
Let’s dig in, shall we?
What is Business Mileage Deduction?
Business mileage deduction is a tax relief that small business owners can use for business miles traveled. Mileage deduction rates are for self-employed people. Let’s break it down even further. If you use your vehicle for business purposes, you should know that the standard mileage rate method is one of two ways of claiming a tax benefit for car-related costs. You must be wondering what’s the other method. The actual expense method is the other way which lets you claim a deduction for car insurance and deductible car repairs, among other vehicle expenses.
For 2024, the IRS establishes mileage tax deduction rates as follows:
1: 67 cents per mile for business purposes.
2: 14 cents a mile for good causes.
3: 21 cents per mile for medical and moving purposes.
Those standard rates are reviewed annually. In some instances, they would even change during the middle of the year.
Now here is where things get interesting. Choosing the standard mileage rate method versus the actual expense method has its own implications.
Standard Mileage Rate Vs Actual Expense Method:
If you choose to use the standard mileage rate for a car you own, you have to apply this method the first year that car is used for business. You must make an election by the return due date (including extensions) of the year the car is placed in service. Standard mileage rates are described below. If you decide later to use a different method, there are specific depreciation rules.
If you selected the actual car expense method in the first year you use the car for business, you must continue to select that method every year you use the car for your business.
IRS says that you cannot use the regular mileage rate If you operate five or more automobiles simultaneously (i.e., fleet operation), claim a depreciation deduction for the automobile by any method other than straight-line, claim the Section 179 deduction for the automobile, claim the special depreciation allowance for the automobile, claim real expenditures after 1997 for a car you lease and are a rural mail carrier who got a “qualified reimbursement”
Mileage Deduction for Employees:
The bad news is that due to the Tax Cuts and Jobs Act of 2017, your employees can’t claim it, but you can keep providing mileage reimbursement to your employees.
Let us tell you why and how. Before the Tax Cuts and Jobs Act passed in 2017, employees could deduct mileage and any other expenses not reimbursed by their employer. But today, employers typically pay for their mobile workers’ business travel in one of two ways. Either by reimbursing them for using their personal cars or by providing company-provided vehicles. Reimbursement for the use of personal vehicles can take the form of a car allowance or mileage reimbursement. Vehicle programs are an important business tool for company operation. Still, they are most useful when the company runs them equitably and accurately.
That can be challenging with a mileage reimbursement, car allowance or fleet program. In recent years, the IRS has been auditing mileage more often, and as anyone who’s been audited can attest, there are few more distracting or disruptive exercises your organization can be put through. On that note, let us give you a reality check. Some companies still trust their employees to track business mileage manually. Unfortunately, this often results in mileage fraud or incomplete mileage logs. Without complete mileage logs, your employees can’t prove their business travel and reimbursements and without proof, they could fail their audit. The employee would be responsible for paying penalties and back taxes and this raises an important concern. If this audit fails, the IRS is likely to probe into all your other mobile employees and the whole company.
Self-Employed Workers: What Mileage Can Be Deducted
The mileage deduction for the self-employed is the largest one possible. For anyone who works for themselves, this one can be super valuable. For gig workers, in particular, such as delivery drivers, it is likely to be crucial to your deductions.
You can also rack up deductible business miles from meeting with clients, traveling to secondary work sites, or running errands to pick up supplies. If a person drives for both business and personal purposes, only the miles related to the business are deductible. Business miles are considered only those driven from a person’s principal place of business.
A commute from home to a principal place of business is counted as commuting, even to the self-employed or small businessman. Only those who have an office in their home and whose home is the principal place of business can claim mileage when they go to and from home to conduct business.
How to report miles on your taxes:
So, how do you report miles on your taxes?
When filing your taxes, you will use Form 1040. Form 1040 is your US Individual Income Tax Return, which tells the IRS if you owe more taxes or should be repaid.
As a solo entrepreneur, you can claim business travel expenditures using Schedule C. Complete Part II, Line 9 of Schedule C.
Report either actual expenses or mileage for business use of your car. You will also add parking fees and tolls to the total. If your expense using the actual expense method and claiming depreciation, you will need to complete Part V of Form 4562, Depreciation and Amortization. Part V requires information about your car.
Remember, when paying taxes for your small business, only deduct the cost of an automobile for business use. Do not claim a 100% business deduction on a car unless it is used entirely for business reasons; otherwise, you may face an IRS examination.
How should you track the miles:
According to the IRS, log business miles that an individual has traveled in a year. The log must be detailed, accurate, and contain the following information to meet the requirements of the IRS:
(1) odometer reading at the beginning of the year,
(2) date of the trip,
(3) starting point,
(4) destination,
(5) purpose of the trip,
(6) car mileage at the beginning of the trip,
(7) car mileage at the end of the trip, and
(8) list of tolls or related expenses incurred during the trip. As you can see, the IRS requirements are fairly extensive.
You can track your mileage in 2 ways; Either using manual logs or automatically by using mileage tracking apps.
Using Manual Logs
One of the ways to track mileage is by keeping a written mileage log in your vehicle. Start by creating a logbook to record the date, starting and ending odometer readings, and total mileage driven for each business or client-related journey.
If you go for this method, then you can make mileage tracking an OCD-ish habit for your business. You can dedicate some time every week for recording your business and client traveling and update your mileage log accordingly.
Be sure to include the purpose of each trip in your mileage log, as this information is absolutely necessary to substantiate your expense deductions in case of an IRS audit. You should also save all the receipts, invoices, and other documents related to your business mileage expenses which usually include gas, maintenance, and other vehicle-related receipts.
Utilizing Mileage Tracking Apps
Mileage-tracking apps change the game for independent contractors who need to travel for business. These apps rely on GPS technology to track and record each trip without much effort. They track your business trips automatically and calculate the total distance covered, thus saving you lots of time and effort. By just clicking on your smartphone, you can accurately record every mile driven for work. Doing so will maximize your mileage tax deductions and ensure you meet the rules of the IRS.
Now you must be thinking, are there any other ways you can deduct mileage tax? Let us tell you, Yes there is!
Are you really a charitable person? Do you do volunteer work? Let’s say you use your car to help a charity or you drive down to the nearest animal shelter to volunteer. You can actually deduct the parking fees, the toll fees, and unreimbursed out-of-pocket expenses such as gas or oil. But remember that the expense should be directly related to using the car to give the services.
Here is another kicker, only active duty military members can deduct mileage related to moving on their federal income tax reruns. But it should be related to a permanent change of station.
Now let’s say you have a medical problem and you need to use your car for that. In that case, you make sure that you are driving to the doctor, hospital, or other medical facility, driving a child or other person who needs medical care, or driving to see a mentally ill dependent person if it’s recommended as part of their treatment.
When you are running a business, tracking every mile driven for work or to even see a client is crucial for saving money in your taxes and this is important because if you’re audited, you may need to show a log of the miles you drove to substantiate your deduction. So, don’t let those miles go to waste and there are plenty of ways to track your mileage. Something as simple as keeping a pen and paper in the glove compartment or a quick trip to Google or your phone’s app store will reveal a variety of tools that can streamline things.
