Beyond the daily hustle and bustle of grocery store trips and errand runs, many independent consultants depend on their car as a means to get from project to project, or client to client.
When the family van becomes the corporate car, it’s time to take advantage of deductions for business-related mileage. Here’s what you need to know to properly file transportation tax deductions.
1. Business-Related Mileage
As a general rule of thumb, any car expenses you want to deduct must be necessary, appropriate, and common for your industry. For independent consultants, that generally includes client visits, or driving to a business meeting.
Next, it’s important to clarify that deductible mileage depends on where your primary place of business is located. If you have a home office, all miles are deductible from the time you leave your house to the time you drive anywhere to do anything related to your business.
On the other hand, if you work out of an office separate from your home or have a store, you cannot deduct the miles you drive from your home to your place of work—this is considered a commute rather than business-related travel.
However, if you leave your place of work and drive anywhere to conduct business, whether it’s a client meeting or an office supply store run, you can deduct those miles.
2. Actual Expenses vs. Standard Mileage Rate
There are two ways you can deduct business-related mileage: actual expenses, or a standard mileage rate.
Actual Expenses Method
With the actual expenses method, you can deduct the actual cost of using your car for business, plus depreciation. This method requires more intensive record keeping, but may result in a larger deduction.
To use the actual expenses method, keep track of all of your car-related costs throughout the year, including: gas, oil, tires, insurance, registration fees, licenses, and depreciation. You’ll also need to track your total miles driven, separating out personal miles and business miles.
To calculate your deduction, multiply your total expenses by the percentage of business miles driven during the year.
Standard Mileage Rate Method
With the standard mileage rate method, your deduction is based off a pre-determined cents-per-mile rate for every business mile you drive. For 2017, the rate is 58 cents per mile.
If you choose this method, you’ll need to track your total miles driven, separating personal use from business use. With the standard mileage rate, you can’t deduct actual care expenses for your car such as maintenance fees or insurance. However, you can deduct any business-related parking fees and tolls.
To calculate your deduction, multiply your business miles by the standard mileage rate for the year.
Which Rate Method is Best?
The best way to determine the ideal method for you is to estimate your business-related mileage and costs for a year. To illustrate each method, here is an example:
You are an independent contractor working out of a home office who frequently drives to client sites and business meetings.
Your oil, gas, and repairs came out to $4,000 for the year. Insurance was $1,200, and taxes and fees were $300. Your total actual expenses = $5,500.
You drive your car 20,000 miles during the year: 14,000 miles for business use and 6,000 miles for personal use. You can claim 70% (14,000 business miles ÷ 20,000 total miles) of the cost of operating your car as a business expense.
Actual expenses method: you can deduct $3,850 (70% of $5,500 actual expenses)
Standard mileage rate method: you can deduct $8,120 (14,000 business miles x 58 cents)
The actual expenses method will likely provide a larger deduction if you don’t drive many business miles, and you have a big car that requires more gas or maintenance. On the other hand, if you drive a lot of business miles and have a smaller, more economical car, the standard mileage rate may be your best bet.
It’s important to note that if you don’t opt to use the standard mileage rate in your first year, you cannot use this method in future years. However, if you use the standard mileage rate your first year, you can then switch between the two methods in subsequent years, subject to certain restrictions.
Transportation Tax Deduction Best Practices
The key to deducting business-related vehicle expenses is to maintain good, detailed records. Keep a notebook in your car and at the beginning of the year, write down your odometer reading so you can track your total miles driven. Then, each time you travel, write down your mileage and whether or not it was business related.
Remember, if you have to travel from your house to your place of work, this is considered a commute and cannot be deducted. Likewise, if you are driving home from a business trip and decide to stop to pick up your dry cleaning, any remaining miles are considered personal mileage. It’s best practice to schedule errands at a separate time from business-related travel to simplify record keeping.
As an independent consultant, business-related mileage is an important deduction can add up and make a big difference at the end of the year. It’s always a good idea to consult an accountant or tax advisor to ensure you are maintaining proper records and making the most of your self-employed tax deductions.
This content from MBO Partners does not constitute legal or financial advice.
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