Vehicle Income Tax Deductions

Using your personal vehicle for business use requires vigilant documentation which begins with the New Year. Keeping your documentation correct will save you a lot of money and aggravation when dealing with the IRS.

This article is a call to everyone who uses their personal vehicle for business, to maintain your tax deduction documentation correctly by writing down your vehicle odometer reading on January 1st. This entry alone will be contributory in figuring your total vehicle mileage for the year. Remember that your total vehicle mileage is a required element of proper deduction evidence for submission to the IRS.

The necessity of the total annual vehicle miles is not apparent if you elect the Standard Mileage Rate for your vehicle deduction. The computation to determine your vehicle deduction using this method does not need the total miles accumulated for the year.

Your deduction is a simple multiplication of your business / charity / medical mileage by the IRS rate. However, if you use form 2106, Section-A requires the total annual vehicle mileage. Similarly, the simplified form 2106-EZ implies this required information in Part II. On the simplified form you are required to populate 'businesses, 'commuting', and 'other' miles. The implication here is that if you completely documented your business and commuting miles, the 'other' miles would be your total annual miles minus your business miles, minus your commuting miles.

Conversely, if you elect to use the 'Actual' vehicle deduction method, your total vehicle mileage is a requisite part of your income tax deduction. This method of calculating your vehicle expenses uses the total annual vehicle mileage to prorate the entire cost of operating your vehicle as a ratio of business vehicle miles divided by your total vehicle miles for the year.

For example: if your total mileage for the year was 12,500 and you drove 7,500 of those miles for business purposes, your vehicle deduction prorate factor will be 7,500 / 12,500 or 0.60. This means that 60% of all vehicle costs are tax deductible as a business expense.

Determining which method will yield a higher tax deduction is not a simple exercise. This depends on many variables including the type of vehicle you own, your driving conditions, your driving habits, your insurance premium, etc. The IRS standard rate is typically not the best method for you financially, but it does grant you the benefit of reduced documentation. A study done in 1997 by the Victoria Transport Policy Institute reveals that the cost of operating a vehicle can be as high as $1.25 per mile for urban driving. That $1.25 was in 1997 when gasoline was only around $1 per gallon.

You should never fabricate or estimate any of your vehicle mileage entries. You don't ever want to be in the position of defending your deduction on the allegation of fraud. The IRS has been known to use any vehicle service repair receipts, or possibly state inspection reports (which have the odometer value and date) as a means to invalidate your documentation in an effort to disallow your deduction.

Proper documentation is a requirement for anyone who uses their personal vehicle for business use. You should now, at the very least, go out and purchase a mileage log book from you local office supply store. On the first page you will record your odometer reading for January 1st or you should visit my website and download a free PDF file to use for your vehicle log. You can start off the New Year on the right foot by recording you vehicle odometer now and make a resolution to keep your vehicle mileage log book up to date.

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Comments

[Steven]

I bought a Mileage Logger by Vulocity which lets me forget about this pain indefinitely. It's a small little GPS device that logs the mileage automatically. All I have to do is go online at the end of the year to view the records.