A quick guide to recording mileage deduction for your self-employed business!
1. Always track your business mileage!
I have talked with people who think they can record their personal miles and assume the rest is business mileage. But the IRS Regs say you have to document and record your business mileage.
2. At the beginning of the year write down your odometer reading and the end of the year odometer reading.
If you have missed the start of the year, as many people do, then start today! Record your odometer reading today. Then at the end of the year record, your ending odometer reading. Take the total mileage for the year, divide by the number of months since you started tracking and come up with a monthly number. Then backtrack the months you are missing based on the average monthly mileage number.
You get your odometer reading in May of 30,000 miles.
At the end of the year, your mileage is 47,250 miles.
Step 1. Calculate the total miles driven.
47,250 (end of year) – 30,000 (beginning of the year) = 17,250 miles.
Step 2. To figure out the first four months of the year, we will divide 17,250 by the number of months we tracked May – December is eight months. 17,250/8 = 2156.25 miles per month.
Step 3. Now we will backtrack for January – April 4 months. 2156.25 * 4 = 8625 miles.
Step 4. we have to add back the miles for the first four months we were no tracking, so 17,250 (May-Dec) + 8,625 (Jan-Apr) = 25,870 Total miles for the year.
3. Actual expenses Vs Mileage
Many times it is more beneficial to claim mileage, than the real costs. The reason is you are only able to deduct the percent of expenses that is equal to the percentage of business use. Ex. 9,000 miles of business use, 30,000 total miles so the business use is 30% of total miles. Which means you are only able to deduct 30% of actual expenses Insurance, maintenance, and repairs are examples. So if your insurance is 100 a month, maintenance is 40 dollars every three months (oil change), and there were no repairs. So, your total real costs are 1,320 for the year. Making $396 30% of the total and the only amount that is deductible. While the mileage deduction is over .50 per mile, so 9000/ .50 is $4,500 worth of a deduction.
Documentation can make or break a written mileage log. Write on the receipt the information below:
1. The place you are going
2. The purpose of the meeting (client meeting, business meeting, bookkeeping review, etc. )
3. The first and last name of everyone present
If the mileage log comes under review(via an audit), without the proper documentation, it can be disallowed.
Taking the time to document your mileage correctly, can seem like a hassle. But it is worth it in the long run to have the proper documentation!
Easy Apps for tracking mileage:
Expensify - Relatively easy to track. Can use odometer readings or GPS to track trips. It is somewhat manual to track your drives. You will need to create the report names, then associate each drive with the proper report(s). But it is also useful to track other expenses, not just mileage. And it currently has a free version.
Mile IQ (monthly fee) this is by far the easiest mileage tracking app I have used. It uses your phone's GPS to track trips, and then you add notes about the trip, and swipe left or right to categorize the trip as personal or business. Simple reporting, with an email each month reminding you the report is ready. Also, the app emails to remind you of unrecorded drives, so if that extra reminder is needed, this may be the app for you!