By Kay Bell
If you're self-employed and use your car for work, you get to pick how you want to deduct those business miles. Choose carefully. It could make a significant tax difference.
You can keep track of the actual auto expenses you incur while using the vehicle for business. This includes such things as your fuel costs, vehicle repairs and tires.
Or you can use the standard mileage rate method, which is a per-mile amount that you multiply by the number of miles you use your car for work.
No matter which method you choose, you will need to itemize in order to take advantage of either of these deductions.
Run the numbers for both options before you choose so you'll know which one gives you a larger deduction.
Here’s what this article will cover:
As the name indicates, if you use the actual expenses method, you must keep track of your vehicle's actual expenses.
Allowable auto costs include gas, oil, insurance, repairs, registration costs, garage rental, tires, repairs, depreciation or lease payments and, of course, mileage.
Even a car payment could provide a tax benefit in this case. You can deduct that part of the interest expense that represents your business use of the car.
Plus, you can count tolls and parking fees you pay in connection with your business travel.
When you use your car exclusively for business purposes, this system is simple. Just add all your vehicle expenses and deduct that amount.
However, if you use your automobile for both business and personal travel, you must keep track of the business trips. Only the work-related miles are deductible.
For example, say you drove your car 20,000 miles during the year. You drove 12,000 miles for business and 8,000 miles were for personal use. In this situation, you can only claim 60 percent (12,000 divided by 20,000) of the cost of operating your car as a business expense.
If you find tracking every automotive expense is too tedious and/or time consuming, you may be able to use the standard mileage method.
The per-mile rate is set each year, usually in the fall, by the IRS and is based on an annual study of the costs of operating a vehicle. So this method doesn’t just account for miles driven — it also includes gas, oil changes, repairs, tires, insurance, registration fees, licenses and depreciation or least payments.
If you use this method, you can’t deduct these expenses separately on your Schedule C. However, you can deduct other non-maintenance business-related expenses such as parking fees and tolls.
For the 2016 tax year, the rate for business miles is 54 cents per mile. For 2017 planning purposes, that rate drops slightly to 53.5 cents per mile.
"The biggest mistake I see taxpayers make is wanting to deduct both actual and standard mileage," says enrolled agent Nicole Green of NGG Tax Group, Inc. in Easton, Massachusetts. "It's often a surprise when I tell them it is one or the other."
When deciding which mileage deduction method to use, carefully assess how much you drive for business AND your vehicle's costs. Don't make the decision lightly, since in some cases you're locked into your initial deduction method.
If you own your car and want to use the standard mileage rate, you must choose that method in the first year you use the vehicle for your business. In later years, you can then move between either the standard mileage rate or the actual expenses method.
However, if you choose to claim the actual expenses when you first start deducting your car's business expenses, you must keep using that method for as long as you drive that vehicle for business.
Says Green: "Once I inform clients that they’re stuck using the actual expenses method if they start that way in year one, they’re often discouraged from using actual expenses."
The rule is flipped for a leased vehicle you use for work-related trips. In that case, if you choose the standard mileage rate, you must use that method for the entire lease period.
Regardless of which business mileage deduction method you use, you must keep travel records to help you appropriately claim the miles on line 9 of your Schedule C. The back of that form is also where you record your vehicle's total miles and the number you drove for business.
Record-keeping for the standard mileage rate is generally easier since you’re just tracking miles, tolls and parking.
If you're a traditionalist, keep a small notebook in your car to jot travel details, such as miles to and from your business meeting, as well as the people who attended and what was discussed.
Smartphone apps, such as MileiQ, Motus and TripLog, can also help track business travel.
And Green suggests taking a photo of your odometer at the beginning of the tax year and again on Dec. 31.
In addition to deductible business travel, you might also be able to claim other travel expenses.
When the IRS announces the standard business mileage rate each year, it also sets rates for moving miles and travel for medical reasons. Travel for both these actions is worth 19 cents per mile driven for medical or moving purposes on your 2016 tax return. In 2017, it drops to 17 cents per mile.
Once you calculate your moving expenses, including allowable miles, on Form 3903, you (or your tax software) transfer the amount of the adjustment / above the line deduction to line 26 of Form 1040 or Form 1040NR.
Miles driven as a volunteer to help a qualified charity, such as using your car to deliver food to shut-ins, are also deductible. This per-mile amount is 14 cents. It isn’t adjusted annually for inflation. Your charitable miles value is included as an itemized charitable deduction on Schedule A.
In all these cases, you should keep good records of your tax-deductible travel. Not only will that ensure you get the most out of the tax deduction, but it also can help answer any questions if the IRS audits your tax return.
About the Author: Kay Bell has been a dedicated tax geek for two decades. The award-winning journalist, book author and creator of the Don't Mess With Taxes blog is a native Texan (that explains her blog's name). She's also an avid sports fan, so when she's not delving into the Internal Revenue Code, she's sorting through the performance stats of her Baltimore Orioles, Houston Astros, Washington Capitals and Dallas Cowboys. Connect with her on Twitter @taxtweet.
Disclaimer: We know taxes are complicated, so we provide this information for general educational purposes only. It isn’t intended to be personalized legal, financial or tax advice, and we don’t guarantee the accuracy, completeness or reliability of this content. If you have questions about your personal tax situation, consider contacting an accountant, tax attorney or financial advisor. Come back to Credit Karma Tax when you’re ready to file your taxes for free!