When deducting automobile related expenses, it is imperative that you keep a mileage log. The IRS allows for two ways of deducting automobile expenses.
The first is taking the standard mileage rate. With this method, you take the number of miles you drove for business during that year and multiply it by the standard IRS rate ($0.58/mile for the 2019 tax year). Many taxpayers use this method because it doesn’t require keeping receipts and often results in a higher deduction than tracking actual expenses because most vehicles cost less than $0.58/mile to operate. This method isn’t available for every taxpayer unfortunately. Be sure to check with your CPA before deciding to use this method.
The other method is the actual expense method. This involves keeping all receipts associated with that particular automobile and its expenses.
This includes, maintenance, repairs, fuel, and licensing to name a few. This method still involves keeping a mileage log in almost every case. The mileage log is required to substantiate the percentage of business use that the vehicle has.
If 75% of the miles driven on that vehicle for the year were for business purposes, you would be able to deduct 75% of the expenses for that year. Taxpayers can receive a large one-time deduction in the form of bonus depreciation on a vehicle purchase. Potentially, this allows the taxpayer to deduct the entire cost of the vehicle in the year of purchase.
This deduction has a number of limitations based on the weight and type of vehicle being purchased but the important thing to know here is that this deduction also requires a mileage log to determine the percentage of business use for that vehicle.
Some industries do not have to keep a mileage log under certain circumstances, but for most taxpayers this is a requirement. Your mileage log should include where each trip started and ended, the business purpose for that trip, the date of the trip, and starting and ending odometer readings. That’s a lot of information to write down and keep track of, so we recommend the use of an app like MileIQ.
Automobile expenses can be a large deduction for many taxpayers. Make sure you are keeping appropriate records so that you can take advantage of this deduction!
Any accounting, business or tax advice contained in this communication, including attachments and enclosures, is not intended as a thorough, in-depth analysis of specific issues, nor a substitute for a formal opinion, nor is it sufficient to avoid tax-related penalties. If desired, Arrow Advisors would be pleased to perform the requisite research and provide you with a detailed written analysis. Such an engagement may be the subject of a separate engagement letter that would define the scope and limits of the desired consultation services.
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