Do you keep track of your business miles?
Make tax time easy and keep a Mileage Log in a notebook in your car! UPDATE: use an APP on your smartphone like MILEIQ to make recording your miles even easier.
Watch this video and you'll understand this valuable WRITE-OFF!
In this talk, I'll cover how you can take a write-off for your vehicle that you use for your self-employment business. If you deduct unreimbursed employee job expenses you may be able to use these methods to calculate the deduction as well. However, there are additional rules for deducting this expense as an employee. For more business, accounting & tax topics, CLICK HERE to check out the uTDu Channel.
The self-employed vehicle deduction is reported on Schedule C Line 9. If you use the standard mileage rate method, you must also fill out Schedule C Part IV, but if you use the actual method than the Form 4562 will be attached in the first year and in future years as needed.
There are two methods for calculating a deduction related to vehicle expenses.
Both methods are based on the amount of miles that are driven for business purposes, throughout the year. In order to know the amount of miles driven for business and personal purposes, the IRS requires a mileage log to be maintained as support. A mileage log should include the date, speedometer readings, total distance of trip and business purpose.
The two methods are the Actual Expense method and Standard Mileage Rate method.
The Standard Mileage Rate method is the simpler of the two because it allows for far less record keeping. The deduction is calculated by taking the total business miles driven times the standard mileage rate, which is .56 cents for 2014. So if you had 2,000 business miles, the deduction is 2,000 X $.56 = $1,120. Easy Peasy. Update: 2015 mileage rate is .54 cents per mile.
Like it sounds, the actual expense method calculates all of your actual vehicle expenses, including: gas, oil, repairs, maintenance, insurance, depreciation or lease payments, etc. If you own your vehicle - this is a capital expense and must be depreciated according to the rules. See the depreciation talk under the tax concepts section. Insert If you lease a vehicle you can include your lease payments. However, for both depreciation and lease payments there may be limitations to prevent luxury costs. For depreciation, the total amounts are capped and for leasing there are inclusion amounts that may need to be calculated. See publication 463 for details.
If the taxpayer used the vehicle less than 100% for business, then only the business use percentage can be deducted. To calculate the business use percentage take the total business miles divided by the total of all business and personal use miles driven. There is a special rule that allows investment related use, to be included as business use - only for the purpose of calculating the business use percentage.
Parking and toll costs are deductible with either method.
Once the actual expense method is used and depreciation expense has been taken on a vehicle, the actual expense method must be used for the rest of the life of that vehicle.
While the IRS never allows for the use of estimates, they do allow what is called sampling for calculating your business miles. If your business driving remains consistent and is documented through invoices and other record keeping activity - then you can use records for a period of time and extrapolate them for the total. The IRS provides an example of keeping track of the first week in every month and then using the total miles from that week for all of the other weeks in the month. Personally, I would recommend getting into the habit of maintaining your mileage log, as it can be difficult to maintain the needed records if you do not develop a consistent habit.