Now let’s talk about the most common mistake that business owners and professionals make with vehicle expenses – specifically, calculating them the wrong way.
You know that you can calculate your “actual expenses” for operating your vehicle. Or you can use a much easier standard allowance. For 2016, the allowance is 54 cents per mile. Sounds pretty good, right? Well, it might surprise you to see how much it really costs to operate your car. And it’s almost never 54 cents per mile!
Every year, AAA researches vehicle operating costs. As the chart shows, if you’re taking the standard deduction for a car that costs more than 54 cents/mile, you’re losing money every time you turn the key.
Your first step involves calculating your “business use percentage” (BUP) for your vehicle. The IRS divides your trips into three categories: 1) business; 2) commuting; and 3) personal. Ordinary commuting and personal trips are nondeductible. Trips from home to your first business stop and trips from your last business stop to home are personal. (Daily trips to the bank, post office, and similar stops where you perform no service don’t qualify as “business.”)
Oh, and because you’ll ask – yes, you can deduct the cost of plastering your name and logo on your vehicle. But the IRS specifically says it won’t convert personal or commuting miles into deductible business miles. Sorry!
Now that we know what qualifies as “business” miles, the IRS gives you four ways to track them. All four require you to keep “adequate records or other sufficient evidence” to support your business use. This means logging mileage at least weekly and keeping receipts for all expenses over $75.
- “Brute Force” method: Record every business mile you drive for the year. Divide your business mileage by your total mileage for the year to calculate BUP. (If you use more than one car for business, this is the method you have to use. I know, what a hassle.)
- “90 days” method: Record your business miles for a “typical” 90-day period. Divide that amount by your total mileage for that period to calculate BUP, then use that percentage for the entire year.
- “First Week” method: Record your business miles for the first week of each month. Divide that amount by your total miles for that period and use it for the entire month.
- “Simplified” method: Record your starting and ending mileage for a 90-day period. Record your personal and commuting miles for that period, and assume all the rest of your miles are for business. Calculate your BUP and use it for the entire year. (This is the easiest method if most of your miles are for business.)
Travel between temporary business stops is deductible. So, for example, if you leave home, make six business stops, meet a prospect for dinner, then drive home, your mileage between your first stop and the restaurant is deductible. However, if you have a regular business stop (one that you make at least 8 to 10 times in a six-month period) that you expect to last less than a year, you can count those as business miles, too. If home is your principal place of business, then all business trips are deductible.
Once you’ve calculated your BUP, you have two ways to calculate your deduction.
- The mileage allowance – which was 54 cents/mile for 2016, plus parking, tolls, and your BUP of interest on your car loan and state and local personal property tax on the vehicle. (While we’re at it, the allowance for charitable use of the vehicle is capped at just 14 cents/mile, and for medical and moving use, 23.5 cents/mile.)
- The “actual expense” method, where you deduct your full BUP of all expenses. These include:
- Depreciation and interest (if you’ve bought)
- Lease payments (if you’ve leased)
- Gasoline, oil, and car washes
- Tires, maintenance, repairs
- License and registration fees
- Personal property tax
- Parking and tolls
Which one saves the most? Easy – try them both and see. Generally, the more you drive, the more the allowance saves. That’s because the allowance assumes 14 cents/mile for depreciation – and as your miles climb, that “assumed” amount can be far more than your actual depreciation. If you’re a real road warrior, logging 30,000 or more business miles per year, you’ll almost certainly come out ahead with the allowance, no matter what you drive.
Okay. What if you’ve been taking the mileage allowance (because it’s easier, or because your tax preparer told you it was all the same), and you discover you ought to be taking actual expenses. What now? Well, if you’re taking the allowance now, you can switch to the “actual expense” method if you own your car – but not if you lease.
Unfortunately, the reverse isn’t true. You can’t switch from actual expenses to the mileage allowance. You also can’t use the allowance if you use five or more vehicles in your business, or you use your vehicle for hire (taxi, Lyft, Uber, etc.).
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