Business Mileage and Your Tax Return

If you are a business owner and you use your personal vehicle for business, you may be eligible to deduct some car-related expenses on your tax return. This is a huge benefit for a lot of small business owners. So what, exactly, can you deduct?

If you used the car exclusively for business (you didn’t drive your kids to daycare in it, you didn’t take it to the grocery store, and you didn’t commute from home in it), you can deduct all of the vehicle operating expenses. But, if you’re like most small business owners, you don’t have the budget to keep an extra car hanging around just for business use. You probably use the same car for both personal and business purposes. If that’s the case, you can only deduct the car-related expenses that are attributable to “business use.”

It’s important to know that commuting between your home and work place is not considered business use. Generally, business use refers to travel between two business related locations, for example your office and a client’s office, or between your office and the bank to make business deposits. If you have a home office your situation is a little different, and you may be able to deduct travel between your home and business destinations.

There are two ways that you can calculate and report the cost of using your vehicle for business, the Standard Mileage Rate Method and the Actual Expense Method. Let’s break them both down:

Standard Mileage Rate Method

Under this method, you take the number of business miles driven and multiply it by the IRS standard mileage rate. For 2015, the standard mileage rate is 57.5 cents per mile. In 2016, mileage reimbursement rates will drop down to 54 cents per mile. In addition to the standard mileage deduction, you can deduct for the amount you spent on parking and tolls for all business related trips. A few important facts about the Standard Mileage Rate Method: You can only claim the standard rate for up to four vehicles, and there are a few specific situations that restrict claiming the standard mileage amount; it’s wise to consult with your tax preparer.

Actual Expense Method

Using the Actual Expense Method, you keep track of actual expenses of operation and deduct the portion of those expenses that are related to the vehicle’s business use. When calculating the cost of operation, you can include the following: vehicle depreciation, gas and fuel, car insurance, licensing, registration fees, repairs, maintenance, tires, and parking costs and tolls.

If you choose to calculate your deduction this way, you must have complete records of the expenses. This means you need to keep a mileage log, as well as receipts for any auto-related expenses. For small businesses that don’t have frequent vehicle use, keeping exhaustive records may not be worth the time or cost. 

Regardless of which method of claiming your mileage deduction you use, you should be prepared with proper documentation for all mileage and auto-expenses. We recommend keeping a little notebook in your car and tracking your business miles in it. If you prefer the electronic method, there are also phone apps that can track your business miles. Some of the most populare are MileIQ and MileBug, available at the iTunes Store. If your tax return is selected for audit, the IRS will require your records regardless of which method you use to calculate your deduction. 

 

FAQ relating to your car and tax deductions

Can I deduct vehicle expenses on a leased car?

Yes, if you are using a vehicle with a lease for qualified business purposes, you can still claim a deduction. It is important to note that if you use the standard mileage rate to determine your deduction one year for a leased vehicle, you must continue to use the standard mileage method in future years. Additionally, leased cars are not depreciated.

 

My business’s logo is on my car. Does that mean all of miles are ‘business miles’?

No, this does not qualify as business use.

 

What is depreciation?

 As a general concept, depreciation is meant to compensate you for the fact that the value of your asset goes down over time. Some assets appreciate (like real estate in a good market) and others depreciate (with a few exceptions, your car will never be worth what it was when you drove it off the lot). On your tax return, you may be able to deduct an amount over time, to compensate you for your asset’s decrease in value. This is called depreciation.

 

I use my personal vehicle while at work and my boss reimburses me for mileage. Am I eligible for a mileage deduction on my tax return?

Because your employer reimburses you for your mileage, you are not eligible to deduct mileage. You do not, however, have to report this reimbursement as income. If you are an employee and you were not reimbursed for your travel, you can take a deduction on Schedule A of your tax return.