As we get down to the end of the year, it’s important for small business owners to ensure they have proper substantiation to take a vehicle deduction.
The IRS requires contemporaneous documentation for this write off. While the IRS has accepted reconstructed records during an audit--don’t count on this. With an increase in audits to promote compliance, an auditor doesn’t have to accept reconstructions and may disallow the deduction altogether if you don’t have all the necessary documentation.
If you use your vehicle less than 50% for business, you may take a deduction based on the mileage rate times the number of business miles driven. You cannot take a deduction for your actual expenses unless you use your vehicle for business more than 50% of the time.
If you want to use the standard mileage rate for a car, you have to select this option the first year you own the vehicle. Then in later years you can alternate between using the standard mileage rate or actual expenses method.
Regardless of which method you use, the IRS requires that you track total mileage for the year as well as business miles driven. The mileage rate for 2012 is 55.5 cents per mile. That rate increases to 56.5 cents per mile in 2013.
The IRS wants proof of business use, and the easiest way to accomplish this is to record your beginning odometer reading in your appointment book on Jan. 1 and your ending odometer reading on Dec. 31. Subtract one from the other to arrive at your total mileage for the year, which is something the IRS asks for on your tax return. If you have a hard time keeping a mileage log, then mark down your business miles and personal miles for a couple of weeks each quarter to determine the percentage of business expenses you will take on your tax return. The IRS has allowed this estimation method in the past.
If you haven’t recorded your odometer readings , check your files for repair receipts. Your mechanic records your odometer reading at each visit. Find a receipt from the beginning of the year and extrapolate back to Jan. 1 to determine a beginning mileage figure and then subtract that number from your odometer reading at the end of the year.
Remember, if you work from a home office, your business mileage begins in your driveway. Trips to the office supply store, to visit clients or to attend business meetings are all deductible. If you forget to record the mileage for any business trip, use Mapquest or some similar program to determine the mileage.
If you deduct actual expenses instead of using the standard mileage rate, don’t forget to add up fuel, repairs, car washes, oil changes, vehicle registration fees, insurance, loan interest, depreciation, upgrades, maintenance contract fees and anything you spend money on for your vehicle.
To determine your deduction you simply determine business use and multiply your expenses by that factor. For example, you drove 10,000 total miles for the year: Your business miles totaled 8,000 and your business usage of your vehicle is 80% (8,000/10,000). Your total expenses were $5,000 and your allowable vehicle expense will be $4,000 ($5,000x.80).
Bonnie Lee is an Enrolled Agent admitted to practice and representing taxpayers in all fifty states at all levels within the Internal Revenue Service. She is the owner of Taxpertise in Sonoma, CA and the author of Entrepreneur Press book, “Taxpertise, The Complete Book of Dirty Little Secrets and Hidden Deductions for Small Business that the IRS Doesn't Want You to Know.” Follow Bonnie Lee on Twitter at BLTaxpertise and at Facebook.