One not so frequently mentioned provision in the new tax law is the complete elimination of miscellaneous itemized deductions. Because the deduction was only helpful to the extent that they exceeded 2% of adjusted gross income, just a minority of taxpayers used it. But for those that did, especially those who qualified because of unreimbursed job expenses, and specifically unreimbursed miles driven as an employee, it potentially is a very noticeable loss.
Side note for Pennsylvania taxpayers- unreimbursed employee expenses are still allowed for both the Pennsylvania state income tax and the local earned income tax.
If you are an outside sales representative or a visiting nurse or therapist, you may well rack up quite a few miles driven for your employment in the course of a year. Let’s say you drive 10,000 miles for work purposes and your employer does not reimburse you for those miles. In past years, you could take a deduction for standard mileage allowance of 54.5 cents per mile, or in this case $5,450. On with an adjusted gross income of say $80,000, you could deduct the part of the mileage allowance that exceeds $1,600 (2% of your income), or $3,850. In a 15% tax bracket, that is a real dollar savings of $578 that you are now not allowed to take. That deduction loss also applies to other employee expenses that come out of your own pocket such as uniforms, conferences, professional licenses and insurances, and union dues to name a few. Losing the tax savings on your out of pocket expenses is in effect a salary decrease. So what can you do to keep it? Your employer could set up what’s called an accountable plan, which would reimburse you for documented expenses tax free. To avoid the employer now losing out by spending more for your overall compensation, you could agree to a fixed allowance and reduce your salary accordingly. In other words if you expect your expenses to amount to $500 a month, you could take a salary cut of $6,000 per year and get it back in the form of a tax free reimbursement, and in the end both you and your employer would end up saving on payroll and income taxes.
Despite rumors to the contrary, this deduction elimination does not apply to mileage expenses for the self employed. Sole proprietors may still deduct the standard mileage allowance or actual vehicle expenses for the year.
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. I try to remember to take a picture of the dash late on New Years Eve. 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.
Beyond the mileage deduction under the standard allowance method, you may also deduct tolls, parking fees, and a portion of any interest on a car loan.
To take actual expenses, your record keeping must be even more diligent, especially for miles, since the amount of expenses that are deductible goes according to the proportion of business miles vs total miles driven for all purposes. 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 is deductible.
You may have heard leasing a car through your business allows you to write off the whole lease payment. Unless you use the car exclusively for business that’s a negative- it’s still only the portion of the payment corresponding to percentage of business use for the year. If you do use the vehicle primarily for business though it can give you a nice write off, although so can taking a deduction for depreciation on a car you own plus the business percentage of any loan interest.
Not sure which method will be best? You don’t have to decide until it’s time to file your taxes. In general, if you have a high priced vehicle or one that is expensive to repair and maintain (or both), the actual method will be more beneficial than the standard mileage allowance. Or, even on a moderately priced vehicle, if your overall miles are low but a large percentage of them are for business, the actual may also net a bigger deduction. If you’re unsure, keep all of your receipts and records so you can decide at year end. But if you use the actual expense method 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 year to year.
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 company tools in your trunk 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 have two offices, the miles you drive between them are deductible, as well as any miles you drive to see customers or run business errands. Additionally, miles driven to a conference or to the airport to fly for a business trip are deductible.
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. So if you do your administrative work in your home office and see clients at a rented office, miles from home to the outside office are deductible, whereas if you did not have the home office they would be considered non deductible commuting miles.