One of the most common tax deductions available to a good many Americans is unreimbursed expenses associated with using their personal vehicle on the job. Sometimes this applies to an employee who is asked to run errands while at work, or to sales or service people who are not provided a company vehicle and who must travel extensively every day. Sometimes it applies to self-employed individuals who consider their own car or truck a company vehicle, but who purchased the car themselves and also use it for personal travel.
Whatever the circumstances, most taxpayers misunderstand how this deduction is claimed, so this month I will summarize the rules that the IRS expects them to comply with in order to benefit from what can be a very lucrative deduction.
Rule #1 is that you have your choice of claiming either your actual automobile expenses, like gas, oil, tires, repairs, insurance, etc. Or, you can claim a standard IRS rate for every business-related mile you drive (50 cents per mile for 2010). But you cannot take both.
Rule #2 is that you have to keep a written record of your mileage in order to claim either version of the deduction. You would be surprised how many people want the credit without making the effort to maintain a mileage record, relying instead on ceiling-tile receipts (so named because they involve staring at the ceiling while saying, “Oh, I guess I drove about…”).
As a result of this frequent abuse of the vehicle expense deduction, the IRS has modified the tax forms to require the preparer to enter the actual amount of total miles driven during the year, and the actual amount of business miles and commuting miles driven, and to calculate the business percentage of those miles. This is then used to arrive at a percentage of vehicle expenses to claim, or the total of deductible miles that can be multiplied by the mileage rate. It also requires the preparer to state that the taxpayer has a written record to prove his claim, whether it is a mileage log or accumulated receipts for actual expenses (and since you are only allowed to take the percentage of actual expenses that corresponds to the percentage of your business miles, you have to keep a mileage log either way).
Please don’t ask your tax preparer to lie for you! If it isn’t worth it to you to actually keep an accurate mileage record, it isn’t worth it to him to be fined up to $5,000 for knowingly filing a false return.
Rule #3 is that only miles driven as part of your job are deductible, whether it is to meet with a client, attend a conference, or pick up office supplies. Miles driven from home to the place you work are considered commuting miles, and are not deductible. Even if your commute is a hundred miles a day, and even if you don’t have a fixed place of business (for example, if your workplace is a construction site and changes from time to time) commuting miles are not deductible.
Keep in mind that there is also a mileage deduction for medical and charitable use of a personal vehicle, or for moving, all with the same recordkeeping requirements. The medical and moving mileage rate for 2010 is 16.5 cents per mile; the charitable mileage rate is 14 cents per mile.
I can tell you from personal experience that the mileage deduction is almost always better than a percentage of your actual expenses, and at up to 50 cents per mile, it can add up to thousands of dollars in a hurry. Well worth the extra time and effort to qualify for it!