Want to Deduct Vehicle Expenses for Business? Detailed Recordkeeping Required!
Most business owners want to know how they can deduct vehicle costs against their business income. As they should, since when a car or truck is legitimately used for business purposes, the costs associated with that use is a deductible ordinary and necessary business expense, including potential depreciation deductions.
The problem is, while they want the benefit of the deduction, most do NOT want to follow the strict rules for substantiating such expense and commonly fail to do so.
But here is the catch; if your business is audited, if you have deducted vehicle expenses, the IRS will most assuredly ask for mileage logs. Such logs are mandatory and are used to determine how much the vehicle has been used for business versus personal use. The IRS tends to be especially sensitive to this issue if you are self-employed or you employ relatives in your business. So keeping accurate records is of paramount importance!
What follows are the basic rules that need to be followed, as well as some exceptions.
You Must Keep Mileage Logs
There are a couple of different ways you can get tax benefits from your ride. First, you can deduct actual vehicle expenses, including depreciation, gas, and other vehicle operating costs. Another method is the standard mileage method, which allows a deduction based on the standard rate for each mile the vehicle is driven for business purposes. The standard mileage rate is 58 cents a mile for 2019, so for example, if you drive 10,000 miles for business purposes, your deduction is $5,800 under the standard mileage method.
Regardless of the method used, the recordkeeping requirements are the same. They are also the same whether you are the only one who uses a vehicle, you have employees who use company vehicles, or an employee uses his or her own vehicle and is reimbursed by the business.
Vehicle logs must provide the following information for each business trip:
ï Business purpose,
ï Start odometer reading,
ï Stop odometer reading, and
Employees who use their own vehicles must provide these details to their employer. If an employer reimburses an employee without the required documentation, the reimbursement is taxable income. If an employee uses a company vehicle, the IRS considers any usage other than business or is unaccounted for as personal use, and the value of personal use must be included in the employee's income for the employer to secure a deduction.
The IRS requires "contemporaneous" recordkeeping for mileage. That means a recording at or near the time of the trip. You can record the mileage at the time of the trip and enter the business purpose at the end of the week. But waiting much longer could raise suspicion about the validity of the vehicle log and jeopardize the deduction.
The IRS requires varying levels of detail depending on the circumstances. For instance, you might be able to list only the customer's name if you visit someone on a regular basis. But cold calls to prospective customers may require more detailed information in your log. A single entry may be enough for visits to several customers in the same day, but you need to log any detours taken for personal reasons, such as personal errands or lunch with your spouse. By the way, commuting is NOT considered business mileage.
In some cases, you may be able to avoid recordkeeping if your company maintains a formal policy forbidding employees from using company vehicles for personal reasons. However, this exception must be a written policy that meets several strict conditions. Further, the exception applies only to employees who are not so-called "control" employees, the definition of which among other things includes you, the business owner.
There are Exceptions!
I have used the term "vehicle" because the recordkeeping rules apply to more than just cars. Technically, every vehicle is subject to the rules. But the IRS permits specific exceptions for the following vehicles that are unlikely to have more than a minimum amount of personal use:
ï Delivery trucks with seating only for the driver or only for the driver plus a folding jump seat,
ï Buses with a 20-person minimum seating capacity,
ï Special purpose farm vehicles, and
ï Any vehicle designed to carry cargo with a loaded gross vehicle weight over 14,000 pounds.
Not listed above are more obvious exceptions, such as cement mixers, combines and bucket trucks. In addition, the IRS permits exceptions for trucks or vans that have been specially modified so that they are not likely to be used more than a de minimis amount for personal purposes.
Complying with the IRS mileage recordkeeping rules can be tedious, especially for those who drive significant distances for business purposes. Here are some ways you can simplify the process:
Use technology. Mileage logs don't have to be kept in a written diary or day planner. I personally use an app called MileIQ to keep my records; I'm sure there are others. If you use this method, just be sure that you and your employees back up the electronic mileage logs regularly to prevent loss of information.
Apply sampling methods. While beyond this article's scope, the IRS allows the use of sampling methods to substantiate mileage in some situations.
Use standard mileage rates. The easiest way to simplify is to use the standard mileage rate rather than tracking actual expenses. Doing so eliminates the need to save expense records. The downside is that this method may understate expenses, particularly if you drive an expensive gas guzzler.
If a vehicle's business use is high but its total use is low, actual fixed costs are likely to be higher on a per-mile basis than with the standard mileage rate. However, the reverse can also be true, and in cases where a large number of business miles are driven but actual costs are relatively low, the standard mileage method may yield better results.
Business-related vehicle expenses can add up and provide a significant tax benefit. But the saying "easy come, easy go" seems appropriate, since as easily as they add up, so too can vehicle deductions vanish in an audit. The key to success is making sure you have up-to-date mileage records.
Please don't assume you can simply put together a mileage log when the IRS comes calling. Case after case shows that approach fraught with peril. For example, a savvy agent questioned the fact that a taxpayer used the same pen over a two-year period. In another, the IRS noticed that the taxpayer claimed to go to the post office but an hour later was 110 miles away seeing a client. In cases like these, the results were "no bueno" for the taxpayer.
Just remember, when it comes to mileage recordkeeping, the IRS rarely allows exceptions for its strict rules. Want the deduction? Then keep the records!