The internet is a wonderful thing. Being able to communicate with someone in Tokyo from your living room is kind of cool, especially if you think about how long it took to send a letter from the US to Asia thirty years ago. However, in your business, there are going to be occasions when you are going to have to travel to client’s place to do business. And often, that means driving over there. Of course, the cost of this mileage can be deductible on line 9 of the Schedule C, but there are some things you need to consider when determining whether you can take a deduction, as well as the amount to deduct.
First of all, you need to track your mileage and divide it between business and personal purposes. Unfortunately, you cannot deduct the mileage related to personal trips. When tracking your mileage, you want to make sure you record:
- The date of the trip
- The name of the client
- How many miles you drove for the meetings or for getting work done for the client.
When you report your automobile expenses on your taxes, you will need to choose the method by which you will calculate the amount of your deduction. The IRS has two methods by which you will determine your expense amount. You will need to select either the Standard Mileage Rate Method or the Actual Expense Method. What’s the difference between the two? Let’s take a look.
To calculate your deduction with the Standard Mileage Method, you need to do the following:
- Take the total number of business miles driven during the year and multiply that by the mileage rate the IRS determines is to be used for the year. The last time I checked, it was $0.565 a mile, but you can the IRS’s website, or check with your accountant, for the latest rate as it changes yearly.
- Take the amount calculated in the previous step, and add that to the business-related interest on the car loan, state and local property taxes, tolls and parking you incurred during the year.
In the Actual Expense Method, you can deduct the actual amounts you spent related to the business mileage you traveled. The following are the types of expenses you can deduct:
- Gas and oil.
- Repairs, maintenance, and tires.
- Lease and rental fees.
- Car washes (Done professionally, of course).
- Cost to keep your vehicle in a garage.
- Parking fees when you are driving for business purposes, of course.
- License and registration fees.
- Insurance premiums.
Once you have totaled the total amount of expenses spent on your vehicle, you would then need to determine the number of business miles driven during the year and divide that amount by the total number of miles driven for the vehicle during the year. Take that percentage and multiply it by the actual amount of expenses incurred during the year.
So what happens if you lease the automobile? Can you deduct your lease payments? You can deduct the cost of the lease, with some restrictions. If you lease a vehicle, you can deduct the portion of each lease payment that is for the use of the car for business or work related matters. However, the portion of the lease payment that is used for commuting or for personal use is not deductible. Additionally, you may have to make advance payments as a part of your lease agreement. These advance payments are required to be allocated over the entire period, so you only get to deduct the portion of the advance payment related to the current year.
Now for some bad news. Let’s say you commute to your day job. Can you deduct the automobile expenses related to commuting? No, but if you have a temporary work location outside the metropolitan area where you live, the expenses to that location are deductible. Note the term “outside.” You can’t deduct your expenses if the travel is within your city or town. Your daily transportation costs can be deducted if:
- You have one or more places away from your home where you regularly work, or
- Your home is your principle place of business and you go between there and another location in the same business on a regular basis, even if the work is temporary and regardless of the distance.
Also, if you have a part-time job, you cannot deduct travel expenses from your home to that job either.
What about the cost of those signs you see on the side of cars and trucks? That actually would be considered advertising expenses, and go on Schedule C Line 8 with other advertising expenses.
Quite a bit to think about, isn’t it? Don’t be afraid to ask an accountant if you have questions and for guidance on taking the deduction for automobile expenses. I always enjoy helping my clients understand their tax situation, and I would rather have you ask what something means than have you make a decision based on information about which you are confused. If you have questions, find a local accountant to give you a hand. We love to help people with their taxes, and always invite questions. You can also submit your questions in the comment section below, and I would be glad to answer them.
Stuck on another line of the Schedule C? Visit our Schedule C Line by Line Guide.
Chris Peden, CPA, CMA, CFM has over 15 years in the corporate world helping companies meet their regulatory compliance requirements. He also assists small business owners with organizing and making sense of their finance information. You can reach him at firstname.lastname@example.org, or check out his blog at www.theaccountingscribe.com . In accordance with Circular 230 Treasury Department Regulations, we are required to advise you that any tax advice contained in this article may not be relied upon to avoid penalties under the Internal Revenue Code. If you are interested in a written opinion that can be relied upon to prevent the imposition of tax-related penalties, please contact the author.