Q: I am in my car for business purposes a lot, but I have always been confused about what I can and can’t deduct on my tax return. Can you offer any guidance?
A: Taxpayers are all over the board on deducting auto expenses. I have clients that think their car is 100 percent business use (“I wouldn’t even own my Maserati if it weren’t for my business!”), and some that thinka car-related deduction on their return will result in an IRS agent hauling them off to be forever forgotten in some deep dungeon. The truth is transportation and cars are vital to most businesses and taking a deduction for the business use of a car is perfectly appropriate.
Here are some of the general rules for deducting auto expenses.
If your employer owns an auto that you use for business purposes, the reporting and substantiation is fairly simple. Your employer may require that you keep a log of the use of the vehicle, but as long as the employer maintains a written policy prohibiting all but de minimis personal use, keeps the auto on the employer’s premises, and can provide evidence to support these facts, you should have no tax implications and the employer should be able to deduct 100 percent of the auto related expenses.
If, however, your employer allows you to use the auto for commuting to and from work or for other personal purposes, your personal use will be considered a taxable fringe benefit. Your employer should be reporting income in your W-2 wages for this benefit, and the taxes will need to be withheld. The employer will attribute income to the employee based on either a deemed lease value published by the IRS, or a standard mileage rate.
Standard Mileage versus Actual Expenses
Most employees and many self-employed taxpayers will use the standard mileage rate method in computing deductible auto expenses. This is a simple method where the actual business miles are multiplied by a standard allowance published each year by the IRS. In 2014 the rate is 56 cents per mile of business use. The standard rate is meant to compensate for operating expenses and depreciation of the vehicle, but other non-operating expenses such as parking and tolls may also be deductible.
The alternative to the standard mileage rate method is tracking all the actual costs related to the vehicle. An accurate record of business and personal miles must be kept and used to determine the percentage of the total expenses related to business use. For example if 20,000 miles were driven for business purposes out of a total of 25,000 miles during a year, 80 percent (20,000/25,000) of the auto operating expenses and depreciation would be deductible.
Substantiation of Expenses
If you want a tax deduction for using your car you will need to keep a diary, trip sheets, or other corroborative evidence to document the business portion of the auto expense. I can already hear the collective groan of the readers on this point, but the IRS will disallow all the auto deductions if you can’t show some evidence of your business use of your car. So you will need to make a decision as to which is more painful: keeping a mileage journal in your car or paying more tax to the IRS.
Your records should indicate the date, number of business miles driven, where you went, who you met and their business relationship to you, and the business purpose for the trip. Also, keep receipts, paid bills, and similar information for other related expenses. And estimates don’t work for auto expenses. You can’t tell the IRS, “I used my car at least 80 percent for business so I just deducted 75 percent of my expenses to be fair and considerate.” This argument has been tried, litigated, and lost by more than one taxpayer.
This summary is certainly not complete and I haven’t even touched on depreciation of autos. But keeping good records and using one of the prescribed methods should net some tax savings. And don’t keep your mileage log (or text) while you drive!
The answers in this column are meant to offer general information. You should consult your tax adviser regarding the specifics of your situation.Peter Robbins is a principal in the Boise office of CliftonLarsonAllen LLP, specializing in tax matters for small businesses, individuals, and trusts and estates. Have a question for Robbins? Email your question to [email protected] Enter “Talking Tax” in the subject line.