One of the most stressful parts of tax filings is gathering the information. Looking for cancelled checks to prove charitable deductions or finding tax receipts and interest statements is one thing, but gathering proof of transportation or home office expenses when your record keeping has been lax can be excruciating. Managing tax record keeping as a year round job makes the actual filing of the return much easier. We talked last time about record keeping for some of the most common deductions; this time we will tackle a more complex one, car and truck expenses.
Please note this is intended to be general in nature and not all-inclusive of tax regulation and may or may not apply to your individual situation.
What types of driving are deductible?
You may have auto expenses for your business, for charitable purposes, for medical transportation, or as an employee. All require record keeping, and this is probably the place where people have the most trouble keeping up with documentation.
The IRS code allows auto expense deductions on your personal income tax return in several areas: your sole proprietorship (Schedule C) business, under unreimbursed employee expenses, for medical purposes, for miles driven in service of charitable organizations, and for qualified moving expenses. Medical and charitable deductions are allowed as a standard mileage allowance, which for 2012 is 23 cents per mile for medical purposes and 14 cents for charitable purposes (for 2013 medical mileage goes up to 24 cents and charitable remains the same). For qualified moves, you are allowed to deduct either actual out of pocket transportation expenses, or a standard mileage allowance (23 cents per for 2012; 24 cents for 2013). For those expenses you are not required to complete the more extensive vehicle and mileage questions on the tax forms, but you still must keep a written log of the dates, miles driven, and the purpose. It is important to note that not all qualified auto expenses will actually help you. For instance, medical miles will only help if your medical expenses in general are enough to deduct; not only must you itemize deductions, but your expenses must be greater than 7.5% of your adjusted gross income for 2012; 10% of adjusted gross for 2013. Auto expenses incurred as unreimbursed employee expenses again only help when you itemize deductions, and also when your total miscellaneous itemized deductions are more than 2% of your adjusted gross income- and even then the Alternative Minimum Tax may invalidate the deduction.
What records to keep?
The IRS allows for two different ways to take car and truck expenses when driving for your sole proprietorship or as an employee: your actual expenses or a standard mileage allowance (55.5 cents for 2012; 56.5 cents for 2013). Taking the standard mileage allowance is certainly easier for record keeping, and usually offers the greater deduction, but not always. Regardless of the method you choose, you’ll need to track your mileage all year for all purposes, not just your deductible miles. Record your odometer reading on January 1 and again on December 31, to prove your total mileage for the year. You will need to keep track of the miles driven for business, but in addition, the IRS wants to know how many miles you drove while commuting (not deductible) and for all other purposes. The vehicle you drive matters too. Both methods require you to track your miles and expenses for each specific vehicle you use for these purposes. So if you change vehicles during the year, you’ll need to have two sets of records. To add another layer of complexity, if the IRS changes the mileage rate mid-year, as it did in 2011, you will need to total up your expenses before and after the date of the change- not difficult if you kept good records. To take actual expenses, your record keeping must be even more diligent. Keep receipts for all of your fill ups (not just the ones for business related trips), oil changes, repairs, maintenance, registration, insurance, and even car washes. The actual expense method also allows for depreciation of the cost of your vehicle. You cannot deduct your car payments, but a portion of the interest on a car loan may be deductible (under both methods). However you may be able to deduct a portion of a lease payment using the actual expense method. At the end of the year, under the actual method, you will be able to deduct the expenses in proportion of the amount of business miles to total miles. If you are not sure which method to use, keep all of your receipts and records, and you can decide at year end. One note on using the actual method: if you claim actual expenses in the first year you use the vehicle, you must use the actual expense method every year. Taking the standard mileage allowance in the first year leaves your options open.
What miles count?
As a general rule, traveling from home to one of your regular places of business is considered commuting and not deductible. Same goes for your trip home. Even if you carry tools in your trunk on behalf of your employer, or put a sign on your vehicle, those trips are not deductible. And no matter how many signs you have on the car, you still can’t deduct your vehicle as an advertising expense. However, if you drive from one place of business to another, that portion is deductible. In other words, if you work two jobs, the miles you drive to get from one to the other are deductible. Going directly from your first job in New York City to your part time job in Bushkill can yield a nice mileage deduction (though a bit of exhaustion I imagine).
Trips outside of your regular place of businesses may be deductible as well. If you attend a conference or travel to a temporary location out of town, track those miles. Travel between clients is also deductible. For sales people these miles can add up quickly.
For those with a qualified home office, your trip down the hallway to your office is considered your first work trip of the day, otherwise known as the “footie pajama commute.” Lucky footie pajama commuters can deduct miles from home to another work location in the same trade or business.
Next time we will take on the home office deduction. In the meantime, get that mileage log going!