Part 2 of 3: Easy Targets - Meals, Mileage, and Home Office deductions, soft audit targets for the self-employed.
“Soft target” is a military expression, referring to something that is relatively unprotected or vulnerable to an attack. An audit on your tax returns by the IRS is clearly not a military attack, but it can be quite brutal if your business expenses are… “open to interpretation”, or not well supported. This is the second of 3 articles we will be posting (see Can I deduct my meals as a business expense?) to help business owners understand how to best take advantage of some key deductions on your tax returns and the rules and requirements that will allow you to take those deductions with confidence that they are accurate and valid.
Who can deduct auto expenses? If you are self-employed and you use a vehicle for business purposes, you can deduct the expenses related to that business use- and you have some options to choose from in deciding how to get the best deduction. Unfortunately, if you are employed (receive a W2) and use your personal vehicle for work, you no longer have a deduction available for those expenses, even if you aren’t reimbursed by your employer. Sorry about that.
How do you report and calculate the deduction? You have two basic options – Actual Expenses or Standard Mileage, and we’ll look at the rules and benefits of each option below. But first, do you know what is NOT optional? Recording and reporting your MILEAGE. That’s right – either way you choose, you are required to track and report your mileage.
Tip: Check your odometer at the beginning of each year – because in addition to the actual miles you drive for business use, you will need to report the total mileage on the vehicle for the year. This is the only way you can determine what percentage of your use was for business, a vital part of the calculation to determine your actual expense deduction.
1. Actual Expenses: The vehicle expenses you can deduct include gas, oil, licensing, insurance, repairs and parts, parking fees, and tolls. And you can also take depreciation expense (more about depreciation below). The amount of these expenses that you can deduct, as mentioned above, is calculated by applying the percentage of your business use to the actual expenses.
Warning – be aware that if you choose actual expenses rather than standard mileage in the first year you use a vehicle, you cannot change methods for that vehicle later. You must choose the standard mileage method in the first year or you will not be able to use it later.
Tip: Keep receipts and good records of each of your expenditures. Good bank records in a business bank account or credit card can suffice for obvious expenses, like gas or repairs. If an expense is not so obvious – like a registration fee or insurance payment, you will need an invoice or receipt that is more specific in order to prove that expense in an examination.
You can take depreciation expense on a vehicle – and even some extra bonus depreciation expense or Section 179 expense. Your deduction will be based on the cost of your vehicle (if new) or it’s fair market value in the year you begin using it, as well as the ratio of business to personal mileage as mentioned above. Your tax preparer can help with these calculations.
2. Standard Mileage: You can choose to take a standard mileage rate (58.5 cents per mile for the first part of 2022, 62.5 cents per mile for the last part of 2022) that will apply to all of your business miles driven, rather than adding and documenting all of your actual expenses. This method can save you some paperwork and hassle, but it also has the requirement of tracking and proving your business mileage.
+ Plus – you can add some expenses in addition to the mileage rate, such as parking fees when you’re traveling (but not at your workplace), tolls you pay when traveling for business, and depreciation *(must be straight-line depreciation, no extra bonus or Section 179. Check with your tax preparer to make sure you’re depreciating properly).
Key points to remember:
1. You can choose either actual expenses or standard mileage – but both methods require you to document the purpose and amount of your business miles.
2. You should be able to provide evidence of your actual expenses, if you choose that method, in the form of receipts, invoices, or adequate bank records.
3. Your business vs. personal mileage can be documented with a written log or calendar, or possibly an estimation that is based on your actual experience during a portion of the year if it reasonably relates to your overall usage. Discuss this with your preparer to determine your best method.
4. Depreciating your vehicle can be a great deduction, but there are rules to follow and calculations to document. Get the best deduction you can get but get it properly.
5. Big Wheels don’t qualify – and they’re extremely inefficient for business travel anyway. Thank you for reading this far into my article – that’s just to let you know this wasn't written by a robot.
As always, please discuss these options and requirements with your tax preparer, which can be NEA Financial Services if you would like to contact us: