When you use a vehicle for business, the tax benefits available go beyond the date of purchase. The IRS also allows you to deduct your annual business mileage as a business expense. This is easier said than done, especially if your vehicle use is split between business and personal trips. Who among us typically keeps documentation of each mile we drive? Though it takes a little record-keeping, the effort can be well worth your time.
The Internet is unfortunately overflowing with myths about writing off business mileage. For instance, you may have heard the advice that “if you own a business, you’re married, and your spouse has a car, just drive their car occasionally so you can claim their vehicle on your business tax return.” Remember that to claim a deduction for any vehicle-related expenses the vehicle must be used primarily for business purposes. The majority of the miles driven must have a legitimate connection to your work.
So how can you begin the process of documenting your business mileage and getting those tax deductions? Business owners can use one of two methods to calculate their mileage: the standard mileage rate or actual expenses.
Standard Mileage: The standard mileage rate is currently at 62.5 cents per mile. To calculate your deduction, take your total number of business miles and multiply it by the standard mileage rate:
# of business miles driven this year X 62.5 cents per mile
Actual Expenses: To use this method, first calculate the business use percentage for your vehicle—for example, let’s say 60% of the miles you drove last year were for eligible business purposes. Take that percentage and multiply it by the total actual expenses for your vehicle:
# of business miles driven this year
# of total miles driven this year
X total vehicle-related expenses this year
Choosing a Calculation Method
Most business owners will find that they are typically spending more on vehicle expenses than they are allowed to deduct. When we look at the surveys being conducted by the National Highway Standards Board or AAA, the average cost per mile can be as high as 78.3 cents, depending on how much you drive in a year. This falls short of the standard mileage rate by a decent amount and begs the question why so many people default to that rate. Typically, the answer has to do with bookkeeping or tracking—it seems easier than keeping tabs on actual expenses.
Business owners need to understand both the differences between the two methods and what they have in common. First, regardless of the method you choose, you will have to track your miles. Both methods will require the same level of diligence in keeping records, so the choice between them has more to do with which will lead to the larger deduction in your situation.
The tricky part of strategizing for the 2022 tax year is that we have two different mileage rates assigned:
- Miles driven from January through June = 58.5 cents per mile
- Miles driven from July through December = 62.5 cents per mile
If you did not keep a detailed log of your mileage last year, you may be able to estimate these amounts by splitting your overall mileage in half if your driving patterns are fairly consistent.
Another important thing to note is that businesses cannot arbitrarily switch back and forth between reporting methods. If, for example, you have difficulty tracking your oil changes, car washes, and gasoline purchases one year, and you want to switch from actual expenses to standard mileage just for that year, that is not permitted. The IRS will allow you to switch once from standard mileage to actual expenses but not the other way around. This is why identifying the best tax strategy is essential before committing to a method.
What Qualifies as Business Mileage?
Trips that start from your office will typically qualify, whether you are driving offsite to meet with a client, attend a seminar, make a deposit at the bank, or meet with your tax planner. However, typical commuting miles (e.g. from a residence to a commercial office space that is your primary place of business) are not considered deductible expenses.
One complication is that many people primarily work from home now. One way to increase your overall deduction is to make sure your home office is considered your primary place of business from a tax perspective. If it does, anytime you travel from that home office to a secondary place of business—a secondary office or coworking space, a retail location, a place where you see patients, etc.—that can be considered a business expense.
To qualify your home as your principal place of business, you may need to increase the percentage of time that business is conducted in your home office (versus other locations) and the relative importance of the business activities performed in your home. If you use your home office exclusively and regularly for administrative or management activities and have no other fixed location where you conduct these activities, your home will likely qualify as your principal place of business (see IRS guidelines for more details).
Lastly, to maximize your deduction, you can consider how to increase your temporary business stops—the miles driven to a location where you don’t normally work but where you are traveling for a business purpose. Temporary stops would include any trips that are not routinely done. For example, if you are in the process of moving and you are waiting for your office space to be ready, you may be regularly commuting out of town, but those trips are not expected to go on for more than a year. Similarly, if you are traveling to attend a seminar or a training event, that would be a temporary stop.
Understanding the rules for deducting business mileage will help you prepare to keep accurate records and even to employ new strategies to increase the number of eligible business trips you take. With the current surge in popularity of working from home, taxpayers should especially consider whether they can qualify their home office as their primary place of business from a tax perspective. For some business owners, small steps like documenting the business hours and tasks completed at home can increase their overall tax deduction.
To learn more about how to maximize your yearly business deductions, connect with a Certified Tax Planner today.