In the previous articles, we examined the importance of adequate bookkeeping to account for business expenses and ensure appropriate tax savings for owners. Now, we look at another very important responsibility of bookkeepers: tracking deductible expenses for personal vehicles used for business.
Vehicle Mileage Deductions
Most business owners, unless they have company-owned vehicles used regularly for business, will have business use of their personal vehicle at one point or another. For most businesspersons, business mileage can be a significant tax deduction: one warranting proper substantiation.
Generally, for every business mile you drive in your personal vehicle you are allowed to either take actual expenses as a business deduction, or use the standard mileage rate, if you use fewer than four vehicles simultaneously for your business. In general, however, this choice must be made in the first year that your personal vehicle is used for business miles.
Most business owners choose the standard mileage rate because of its simplicity and ease of calculation. However, bookkeepers should understand both methods, so we will briefly examine both here.
Actual Expense Method
If you choose actual expenses to calculate your business mileage tax deduction, you take all costs associated with your vehicle – including such things as gas, repairs, maintenance costs, insurance, taxes, loan interest, and general upkeep costs – and multiply these costs by the business percentage calculation to arrive at your deductible miles.
To figure the business use percentage, you determine out of the total use of your vehicle for all purposes how much of that was purely for business use. You can use business miles vs. total miles, time for each, or any other reasonable factor to arrive at the applicable business use percentage. Bear in mind that, in the event of an audit, you must reasonably be able to substantiate your calculation. Bookkeepers should be careful to maintain adequate documentation for this figure.
For several reasons, one of which is the ability to prove such a deduction, many business owners and bookkeepers choose rather to use the simpler standard-mileage-rate method.
Standard Mileage Rate
To use the standard mileage rate, simply calculate and contemporaneously record your business miles throughout the period, whether daily, weekly, monthly, quarterly, or annually. Then apply the current federal standard mileage rate to the business miles for the deductible amount. Bookkeepers should note, however, that adequate mileage logs should be maintained for proof.
The easiest way to keep track of all mileage for each year is to keep a running record of the beginning odometer readings at the start of the year and the ending odometer readings on the last day of the fiscal year, which becomes the beginning reading for the next year.
Finally, bear in mind as well that, whichever method is chosen in the first year of the vehicle’s business use, adequate and contemporaneous bookkeeping is essential. Using professional bookkeeping and tax preparers here again can prove to be quite the cost-saver in taxes. So as you are racking up the miles, know that those business-related miles you drive can reduce your tax bill significantly through adequate bookkeeping.