What's The Difference Between Business Miles vs. Commuting Miles For Taxes?
Who would have thought that driving could have been a topic of discussion when it comes to taxes? Leave it to the IRS to attach rules and regulations to even the most mundane and simplistic tasks we do everyday. Yes, while you are driving and blaring music out of your stereo or listening to the latest true crime podcast it could actually be creating an event that is applicable to your taxes at the end of the year. When you really dig down it could result in very significant tax savings, which is my objective today. I will be giving you the ins and outs of the IRS vehicle regulations to help you be able to take advantage of significant tax deductions when you file your tax return.
Different Vehicle Expense Methods
If you have read any previous articles written by me you will know that I always write so glowingly about our pals at the IRS and how easy they make everything. This article is no exception to that pattern. The IRS has two ways that you can expense the business use of your vehicle each year that you use it for business-related purposes. The names of the two methods are the standard mileage rate method or the actual expense method. Let's start with the one we will be talking about today: the standard mileage rate.
Standard Mileage Rate
This is the easiest way, and usually the most beneficial way, to keep track of your auto expenses. The IRS each year will assign a standard mileage rate (in 2021 it will be $0.575) that taxpayers with business mileage can use to calculate the amount of car expenses on their Schedule C/tax return. This is commonly referred to the mileage deduction as well. What this will entail is that you need to keep track of how many miles you put on your vehicle in a year that were for a business purpose. This is most commonly done by keeping a mileage log. This can be done in an excel spreadsheet or even Keeper Tax has a great tool that can help you keep track of all your business miles. Now I know what you are thinking, what if you just run up the miles on your car to get more of a mileage deduction? Before you go out and purchase a car treadmill let's get down to the nitty gritty of the article and find out what can classify as business mileage and what is classified as commuting mileage.
Let's use an easy example to get a base understanding. Say that you have your own small business office that is two miles away from your home. You drive to and from your place of business every day. At least once a week you leave your place of work and drive five miles away to meet with a client. On the day you have your client meeting you will have fourteen total miles driven: two miles to the office, five miles to meet your client, five miles back the office, and two miles home. The IRS mileage rules indicate that your drive to the office and back home from your office are commuting miles, and these miles are not tax deductible. They are considered commuting expenses as if you weren't self employed you would have driven them anyways to drive to your main job. Now what about the client meeting? Those miles would be considered a business trip, and would be tax deductible. Since you had to leave your business location in order to meet with a client then the miles would be qualifying as business miles driven. Pretty simple right?
I know that you are now looking for ways around that rule, because the more miles the better right? Especially in the corona ravaged world we live in now and and everything is home based you are probably thinking "well what if my place of work is a home office?" If we followed the IRS rules in this instance your commute from the bed to the laptop would be your first trip to work and then the first trip of the day to McDonald's for the twenty nugget combo would be counted as a business trip right? Wrong.
Even if good ole' Ronald is one of your clients. You see if you are a home based independent contractor then the rules would be unfair to those who have business offices. They wouldn't be getting a tax reimbursement for the miles that they drove to work and you would be getting reimbursed solely because you like working in your PJ's at home. So for home based businesses your first and last trips of the day count as commuting mileage and are not deductible expenses. So if you want to get some business mileage out of a home based trip go to a temporary work location first then go grab some nuggets with szechuan sauce and forget about work.
Actual Expense Method
This method requires slightly more recordkeeping than the mileage method and usually for independent contractors and freelancers results in a smaller deduction. But I will go over it nonetheless so that you can do it if you need to! If you are using the actual expense method then any expenses you incur on your automobile for a business purpose you get to claim as business expenses. For the tax year this could be your car expenditures for gas, maintenance, registration fees, parking fees, etc. Anything you could think of vehicle related becomes deductible, assuming you are using your vehicle for 100% business purposes. Any less than that then you would just take a percentage of the automobile costs that you incur. With this method you also can take a deduction for depreciation. Depreciation rules differ a lot and can be complicated, so just know that if you are using the actual expense method you can take a deduction for depreciation each year. Instead of depreciation you can just deduct the lease payments on your vehicle to make that portion easier for yourself. Like I said the standard mileage rate method usually is the most advantageous for independent contractors and freelancers and requires less recordkeeping and less accounting knowledge, which let's face it, is probably the best thing about the standard mileage rate!
Here's to tracking miles
There are some caveats to the rules above. Here are some points straight from the IRS website:
In order to use the standard mileage rate you must:
- You must not operate five or more cars at the same time, as in a fleet operation,
- You must not have claimed a depreciation deduction for the car using any method other than straight-line,
- You must not have claimed a Section 179 deduction on the car,
- To use the standard mileage rate for a car you own, you must choose to use it in the first year the car is available for use in your business. Then, in later years, you can choose to use the standard mileage rate or actual expenses.
- For a car you lease, you must use the standard mileage rate method for the entire lease period (including renewals) if you choose the standard mileage rate.
So if you are planning on using the standard mileage rate be sure to adhere to the rules above to avoid a visit from mean old Uncle Sam. Again, if you need help I highly recommend Keeper Tax's services to help you track miles and keep you in compliance with IRS rules and regulations! Besides that, safe driving out there, and be sure to take a long way next business trip you have to rack up those deductible miles!