For many small business owners, the mileage deduction is the largest tax deduction they will take. Think of the possibilities: An hour's worth of driving down the freeway at 65 mph reduces gross income by nearly $40. Contractors, realtors, and owners of other small business ventures can easily drive 20,000 miles a year, resulting in $11,500 in deductions.
The mileage deduction is one of the few you can claim without keeping receipts, although you need a mileage log showing the miles driven, the date, the business purpose of the trip, and the destination. That sounds like a lot of work, and it is for many busy small business owners, but there are several useful tools that simplify things.
Calculating Your Deduction.
There are two ways to determine a mileage deduction: standard rate and actual cost. The first involves tracking how many miles you drove and multiplying that by the government-set standard deduction rate. The second involves tracking the actual costs incurred for gas, tires, garage rent, oil changes, repairs, insurance, and deprecation. With either method you'll also track parking fees and tolls on trip days (but not parking tickets).
If this is the first year you're taking the mileage deduction, Gail Rosen, a certified public accountant in Martinsville, N.J., recommends tracking everything and working through both methods to see which is most advantageous. Generally, the actual-cost method is best if your vehicle is a gas guzzler or has a lot of maintenance costs. With a more economical vehicle, and one that's older, the standard method is likely best; plus, it's far easier to track. Switching from one method to another can be difficult, and if you ever want to use the standard method you must use it the first year that your vehicle is used for business.
Some tips that follow apply to both approaches, although the focus is on the standard method for calculating mileage deductions.
Three Easy Ways to Track Miles
Many business owners use a printable template or keep a notebook to record their trips. These are decent methods, but there are simpler ways to track your driving. The three tech-based options below also will create a mileage log to use come tax time.
- MileIQ (free for 40 drives/month, then $5.99/month). This is an iOS and Android app that works silently in the background to track driving data. Users can classify the trip and sync details to the cloud. Although continual use of GPS can eat up battery life, users contend that MileIQ has done a decent job of minimizing this. The app garners strong reviews at the iTunes App store.
- MileTracker ($2.99). An inexpensive iOS app that lets users easily create and categorize trips, MileTracker is a good choice if you prefer an app that isn't always on. (A $3.99 monthly subscription lets you keep it on continuously.) Additional features such as location awareness and cloud syncing are also available for one-time fees of 99 cents.
- MileageWiz ($49.95/year). This mileage tracking aid is useful for people without a smartphone and who drive the same routes all the time. It lets you add clients, stores, offices, etc. and quickly populates the day, week, month, or year to calculate miles driven.
Mileage Deduction Rates for the 2015 Tax Year
The weekly grocery trip isn't deductible, but there are four types of driving trips that are. The standard deduction rate (a cost estimate of operating the vehicle that includes depreciation, insurance, maintenance, repairs, gas, and oil) varies for each and changes every six to 12 months.
- Business: Meeting with clients, driving to rental properties, and other business-related trips are deductible at 57.5 cents a mile.
- Medical/Moving: Moving or searching for a new job and medical-related driving (including driving to the pharmacy to pick up aspirin) is deductible at 23.5 cents a mile.
- Charitable: Driving to donate clothing and other items, volunteer at a nonprofit, and participate in other charitable activities is deductible at 14 cents a mile.
Avoid These Common Mistakes
The mileage deduction is ripe for abuse. Phillip Kochan, president of MileageWiz, says IRS agents used to glance at mileage logs but now scrutinize them carefully. Among his clients he has noticed that mileage log audits have increased more than 1,000 percent over the past 10 years. Missing dates or a log that otherwise looks OK but lacks specific enough business purposes or client names often prompt an audit, which can lead to denial of the entire mileage deduction.
One common mistake is counting the miles driven to and from your office. This is considered commuting and is not deductible, although driving from the office to a client's office is. Rosen, the CPA, says taxpayers with a home office are in an advantageous position because they can start logging miles as soon as they leave the house.
Another common mistake is claiming 100 percent business use for a vehicle. Even if you have a work vehicle, dropping a child off at school or stopping to pick up groceries on the way home are not deductible activities. Unless it's a dump truck, it's rare that a vehicle is used exclusively for business.
Mixing actual cost- and standard-rate methods is another red flag. If you're using the standard rate be sure not to write off gas, repairs, oil changes, etc., because they are already factored in.
Don't Forget This Tax Deduction
If you run a business or do freelance work on the side that requires driving, be sure to take the mileage deduction. It may be too late to create a comprehensive mileage log for the 2014 tax year, but if you haven't filed your tax return yet, it's probably worth the effort to go through your records to count up the client trips taken, determine the purpose, and calculate the miles driven. In terms of tax savings, a partial mileage log is better than none at all. And by all means, immediately start tracking your business trips -- the 2015 tax year is well under way.