Car and truck expense is a heavily audited area on tax returns and also an area where there can be some confusion. First of all, there are two types of methods to calculate deductible vehicle expenses – actual expense or mileage. You cannot take deductions from both methods, you have to choose one or the other.
Mileage does not mean any time you drive your vehicle. In fact, your normal commute to the office is not even counted. The only miles that are deductible are miles traveled for work beyond your normal commute. If your office is 15 miles from home but that day you drove 10 miles to a client, you do not get any deduction for that day because you drove less than your normal commute. Basically, the IRS is not going to supplement your cost of living far from where you work. The mileage method can be more straightforward because there is nothing else to consider, no receipts to keep, or depreciation to calculate. However, you are not given documentation for miles you drive. Therefore, proper substantiation for the mileage deduction is a travel log that shows all miles you are deducting, the day you traveled those miles, and the business purpose. Most people do not have this information and it can be an onerous task to try to recreate a mileage log during an audit. This causes many people to have to use oil change documents, gas receipts or other documentation to make an estimation of work miles that usually works out to be unfavorable.
The other method is deducting actual expenses. Actual expenses include gas, insurance, repairs, oil changes, deprecation on a car you own or a lease payment on a car you lease, and any other car related expense. This may sound like a lot, but unless the car is a 100% dedicated work vehicle there are personal benefits to all of those expenses. To compensate for this personal benefit you have to determine personal v. business use percentage and allocate the expenses properly. The most effective way to determine this is a mileage log, which gets you right back to the mileage deduction required documentation. If you have a vehicle that is dedicated solely to the business it is a much easier situation and all deductions can be taken.
If taking a deduction for vehicle expenses you should analyze both options to determine which is best, and then make sure you document the expenses properly to make the situation easier if you are ever audited. If you have questions about vehicle expenses or need help defending them in an audit contact us at Hone Maxwell LLP today. Also, you can follow us on twitter @HMLLPTax or facebook at www.facebook.com/HoneMaxwellLLP for more tax tips and the latest updates on tax news.