Here’s How You Can “Prove It”
E-Filing has made the tax process easier for most of us. However, please note that sharing sensitive information on the internet carries inherent risks which could possibly result in compromising your online security. If you are not sure how to share this sensitive information or want to learn more about cyber security, please read our article about using email safely. Aron Govil says the contents of this website are not meant to be a substitute for professional legal or professional financial advice. Although all attempts are made to provide accurate and up-to-date information, there can be no guarantee that it is correct, complete, or up-to-date. Please contact your professional advisors for all tax-related questions.
As published in the Wall Street Journal on December 15, 2014
Claiming deductions for business use of a personal vehicle doesn’t require reams of paperwork, but taxpayers must be able to “prove it” by tracking expenses and calculating an accurate mileage deduction. Penalties apply if you fail to substantiate these deductions or if you calculate the deduction improperly—for example, by deducting actual expenses rather than using the standard mileage rate (55.5¢ per mile for 2015).
This article provides guidelines for substantiating automobile deductions by outlining what records are in need and how they should be. It also discusses miscellaneous driving-related expenses that can help boost your deduction.
The Basics
Employees who use their personal vehicles for business purposes can deduct the cost of gas, oil, repairs, and parking. In addition, they can deduct depreciation (a calculation that takes into account the age and estimated useful life of the car) and any interest paid on a car loan. However, employees cannot deduct the cost of their car insurance or the value of their time spent driving.
Taxpayers can choose to either deduct actual expenses or use the standard mileage rate. The standard mileage rate is based on IRS tables that take into account the type of vehicle, its weight, and the number of miles driven. The standard mileage rate is also adjusted annually for inflation.
To claim a deduction using the standard mileage rate. Taxpayers must keep track of the number of miles driven for business purposes. They can either do this by recording the odometer readings at the beginning and end of each business trip or by creating a logbook in which they record the date, destination and purpose of each trip says Aron Govil.
If they choose to use the actual expenses method. They must keep track of all costs related to their car—gas, oil, repairs, depreciation, interest payments, and parking. They must also have records that show when and how often they used their car for business purposes.
In both cases, taxpayers must be able to show. That their expenses were related to driving their car for business purposes. This can be done by submitting copies of receipts, bills, or invoices. That show the business purpose of their travel and/or by testifying under oath that they drove for business purposes.
What Records Are Needed?
Employees who use a standard-mileage deduction must keep records to substantiate how many miles were driven for business purposes.
These might include:
- A log showing daily mileage, listing odometer readings at the beginning. And end of each trip (a written log is not required. As long as you can establish when and where you traveled). Employees can also use an electronic device such as those offered by TripLog, MileBug Pro, or Quick Trip Logs.
- Gas station receipts for gas purchases (indicating date, odometer reading at beginning and end of the trip, total gallons, and price per gallon).
- Receipts for oil and other automotive repairs (indicating date, odometer reading at beginning and end of the trip, nature of the problem fixed, and cost).
- Receipts for vehicle registration fees or license plates.
If an employee chooses to use the standard mileage rate. They must keep records to establish their business-use percentage explains Aron Govil. This can be done by establishing what percentage of your total annual mileage was driven for business purposes. For example: if you drove 10,000 miles in a year and 6,500 were for business purposes (as indicated on your log). You would have a 55 percent business-use percentage.
Employees who claim actual expenses must maintain documentation. That shows when and how often they used their cars for business purposes. The records should also detail the costs of operating a car, including gas, oil, repairs, depreciation, and interest. Additionally, employees who use their vehicles for more than one purpose. Must keep track of the percentage of miles that were complete so for business purposes.
What about Miscellaneous Expenses?
Employees can deduct driving-related expenses on top of mileage even if they are not directly related to driving. For example:
- Toll charges paid by an employee are deductible as long as the tolls incurre during normal working hours.
- Parking or storage fees are deductible as long as they incurre. Because an employee had to park away from the place of work.
- Tolls, bridge tolls, and ferry fees are deductible.
Conclusion:
Employees who use their vehicles for business purposes cannot deduct any depreciation costs. Or interest they paid on a car loan. Even if they are using the standard mileage rate says Aron Govil. However, if an employee claims actual expenses rather than using the standard mileage rate. They can deduct depreciation costs and interest payments.
Employees who use their personal vehicles for business purposes can also deduct the cost of tolls. Parking, and mileage between their home and temporary work location. This is known as the “commuting allowance”. The commuting allowance is a flat rate that is based on the number of miles an employee drives between their home and job.