Learning how to track mileage for your business can be a large feat. Knowing where to start is the first step, and that requires asking yourself a few questions.
1. Did you use a car for business reasons?
If your answer is yes, then let’s keep going. If your answer is no, then you can stop here. There’s no reason to track mileage if you can’t deduct it, and sadly, personal miles can’t be deducted. If only…
2. Can you determine the percentage of miles you used for business versus personal?
This is extremely important, especially if you have one vehicle that you use for both business and personal. You have to be able to total up your miles and determine a percentage for the business amounts versus the personal amounts. That percentage is then used to determine your actual tax deduction at year end.
3. Do you have, and are you willing to keep, the documentation required?
If you want to take a tax deduction for mileage, then you have to at least track your miles. You may also need to track any expenses related to your car and mileage like gas, oil changes, repairs, maintenance, tolls and parking fees. If you’re a detail person who likes to keep records, then this is no big deal. However, that may not be your personality type so it will take some effort to come up with a system that works for you.
4. Are you a business owner, not an employee?
With some of the recent tax law changes, employees are no longer able to deduct unreimbursed expenses. Only business owners or self-employed individuals are able to take a mileage deduction on their tax returns.
That means that employees who have mileage costs associated with their jobs are in a tough spot. It’s up to the employers to implement a reimbursement system for their employees, or those expenses will just be out-of-pocket.
If you’re an employer and this applies to you, check out this information on setting up an accountable plan.
How to track mileage
If you answered yes to all of the questions above, then you should start tracking your mileage. But how do you do that?
Well, you need to start by doing the following things.
1. Record your beginning odometer reading
This is your mileage starting point and the basis for your possible tax deduction. Take a picture of it, or write down the date and the mileage reading in a log book. Just be sure to keep it somewhere safe because you’ll need it.
2. Begin tracking your mileage (and plan how you will track it)
Every time you drive, you need to track your miles. This is true even if you drive for personal reasons. Use a log book, Excel or a phone app to make your life easier, and be sure to document the business purpose for your miles. The more documentation you have, the closer you are to audit-proofing your business.
Mile IQ is one of my favorite apps. It will track your mileage automatically via GPS every time you leave the house. All you have to do is classify those drives as business or personal, and you’re on your way to a mileage deduction. If you want to learn more, head on over to their site, or use my referral code to sign up here. Mile IQ has an initial free plan so it’s really simple to get started.
Heads Up: This post may contain affiliate links! If you buy or subscribe to something through one of those links, you won’t pay a penny more, but we’ll get a small commission, which helps keep the lights on. Thanks!
3. Be aware that commuting miles are not considered business miles.
What does that even mean? Well, the miles spent commuting from your home to your place of work are your commute. Commuting miles aren’t eligible for the mileage deduction. So, if you travel from your home to a client’s place of business, that trip would be considered personal.
Now, if you go from that first client’s location to a second client’s location, then those miles would be considered business miles. If you then go from the second client’s location back home, then that trip would be considered personal.
Think of it this way. Employees have a daily commute, and they can’t take a mileage deduction. This is how the IRS keeps it fair.
There is one caveat to the commuting miles predicament that you may want to take advantage of. If you have a home office that is used exclusively for business purposes, then you may be able to deduct any miles from your home as well.
Keep in mind though that your home office can’t be used even once as something other than an office for this be allowed. Additionally, if you have an actual office location, then any miles driven for business reasons from that office to somewhere else, will be deductible.
Taking the Mileage Deduction – 2 Method Options
There are two methods you can use to get a mileage deduction.
1. Actual Cost Method
This is exactly like it sounds. You track the actual amounts spent on your car during the year.
Actual allowed costs can include:
- Gas
- Oil Changes
- Repairs
- Vehicle Insurance
- Registration Fees
- Licenses
- Parking Fees and Tolls
- Tire Replacement
- Depreciation or Lease Payments
Documentation is super important here so be ready to keep detailed records.
At the end of the year, the amounts spent on mileage for business reasons are totaled up and multiplied by the percentage you used your car for business.
For example, you drove 10,000 miles in 2019. 4,389 miles were for business purposes and the remaining miles were personal. So, you would take your business miles and divide them by your total miles to get the percentage driven for business. 4,389 miles / 10,000 miles = 43.9%
So, if you spent $5,000 on vehicle expenses, then you would multiply $5,000 by 43.9% to get your mileage deduction of $2,195.
2. Standard Mileage Method
If you absolutely hate tracking details and keeping records, then you may want to go with the standard mileage method. This method is by far the easiest to use.
All you need to do is track your business miles throughout the year. To get the deduction, all you need to do is multiply your business miles driven by the standard mileage rate. This rate is set by the IRS and usually changes a little each year.
For example, you drove 4,389 business miles in 2019. So, you would just multiply your business miles by the standard mileage rate of 58 cents/mile to get your mileage deduction of $2,546.
In addition to that, you can also still add in a few actual expenses for parking, tolls and registration fees.
Which method should you use?
That is completely up to you and what you feel comfortable tracking, but there are also a few things to consider.
1. Do you like keeping records?
If not, then you may want to use the standard mileage method to make your life easier. This method paired with a phone app like Mile IQ would save you tons of time and give you all the documentation you need.
2. Do you drive an expensive vehicle?
If your repair and maintenance costs are really expensive, then it might make sense to use the actual cost method. Usually, a more costly vehicle will cost more to repair. Using the actual cost method could provide a higher potential deduction.
3. Do you drive a crazy amount of business miles?
If you are a road warrior, then the standard mileage method might be the better option. The more miles you drive, the bigger the deduction you get.
Other Things to Consider
There are a few other things you should be aware of when choosing your preferred mileage method.
Switching is not easy
If you choose to use the actual cost method in year one, then you cannot switch methods in later years. However, if you start with the standard mileage method, then you can choose in later years. It’s always nice to have more options.
Consider modeling each method
Before making a decision, model each method to determine your potential deduction. I like to advise clients to track both their mileage and their actual costs in the first year of using their car for business. That way, you can choose between which method gives you the higher deduction.
If you want to look ahead and make a decision at the beginning, then determine your possible deductions using estimates. How many business miles do you expect to drive? What actual vehicle costs do you expect to have? What have prior year amounts been? Use all of this information to estimate your possible deduction under each method.
Wrapping Up
Tracking your mileage and choosing the best method can seem overwhelming at times, but it doesn’t have to be. Using an app to help you track miles will help you breathe a huge sigh of relief. In addition to that, consulting with a tax professional to help you choose the right method for your unique situation will help you move forward and secure your mileage deduction.
Whatever you choose to do, it all starts with tracking your mileage. So, get started, and you can figure the rest out along the way.
To learn more about self-employed taxes, be sure to check out this blog post.
Click here to download a Mileage and Travel Log to get you started.
Note: There are other special situations surrounding depreciation, fleet vehicles and a few other circumstances that may need to be addressed before selecting a mileage method. Consult with a tax professional or the IRS website for more information.
Heads Up: This post may contain affiliate links! If you buy or subscribe to something through one of those links, you won’t pay a penny more, but we’ll get a small commission, which helps keep the lights on. Thanks!
Note: This blog post is meant for educational and informational purposes only. Please contact a tax or accounting professional if you have specific questions before taking any further action. Also note that this list may not be exhaustive depending on your business situation.
