The Quick Guide On How To Track Miles For Taxes
If you drive a car for your 1099 contractor work, you can claim a big tax write off on associated expenses.
Tracking miles for taxes is easy to get right or wrong. Getting it right is crucial since mileage deductions are a sizable tax write-off for most self-employed taxpayers.
While there are two ways to calculate the actual amount of your tax deduction, it all starts with a mileage log.
But before we jump into mileage logs, we need to know what qualifies as business mileage.
What qualifies as business mileage
First things first. Commuting doesn't qualify as business miles. If you have an office, shop, or location where you normally complete your business, driving from your home to that location is considered commuting and isn't deductible. It's no different than if you were a W-2 worker and commuted to an office each day.
And making business calls while commuting won't cut it with the IRS. The commuting rule is black and white in their eyes.
However, if your office is in your home, then any miles you drive to visit clients or customers is business mileage.
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Common Business Mileage Examples
- Driving to client
- Driving to a professional conference
- Driving to meet a client for lunch
- Driving to the bank, post office, office supply store for work-related visits
Not Business Mileage
- Driving from or to home from your office or shop
- Having a sign on your car
Keeping a mileage log
Keeping thorough records is vital for documenting business expenses. And for mileage, you'll need to use a mileage log to track your business miles.
Start by writing down your car's odometer reading on January 1. You'll also record the odometer at the end of the year.
In between, you'll need to keep track of all the business trips you take. You'll need to note the starting odometer reading when you start your trip and the ending reading when you return to your office.
And for each trip, you'll need to make note of where you went and the business purpose of the trip.
Keeping a mileage log book in your car is an easy way to track your mileage. What's important to remember is that the IRS requires your mileage log to be contemporaneous. That means the log must be kept "in real-time". You can't make it up after the fact or come tax time.
There are also several mileage tracking apps that you can add to your phone to automate mileage tracking. Most mileage tracker apps will provide a year-end report that summarizes your mileage information for your tax return.
Tracking Your Miles For Write Offs
The mileage method was introduced by the IRS to simplify the process of trying to keep track of all of your actual expenses. Let's take a closer look at if claiming mileage actually save you more money on taxes.
Choose a method: standard or actual
The IRS allows freelancers, gig-workers like Uber or Lyft ride-share drivers, and the self-employed to deduct their business mileage in one of two ways. There is the standard mileage rate method or the actual expenses method. Let's dive into tracking mileage vs actual expenses method.
Standard mileage rate method
The standard mileage rate method is the easier of the two ways to get your tax deduction. As we'll see later, it doesn't always provide you with the biggest write-off.
Under the standard mileage rate method, you'll take the total number of miles you drove for business purposes in the year and multiply it by the IRS's standard mileage rate. For 2021, that rate is $0.56 per mile.
Throughout the year, record miles driven for work with a logbook, app or mileage keeper. At tax time: claim 54.5 ¢ (the exact amount changes every year) in tax write offs for every mile you’ve recorded.
Actual expenses method
Using the actual expenses method is easy if you're using expense tracking software. You'll start by adding up all your expenses for maintaining your car for the year. Then you'll calculate the percentage of time you drove your car for business purposes and you'll be able to deduct the proportional amount of actual expenses.
Types of expenses allowed under the actual expense method
Using actual expenses can add up quickly for small business owners when you consider all the expenses that qualify. They include:
- maintenance and repairs
- license and registration fees
- parking or tolls for business purposes
- garage rental
- most lease payments
- interest on a car loan
You'll want to keep all records that support the business expenses you deduct from your tax return. This can be receipts, canceled checks, or bills that show the dollar amount, date, location, and the reason for the expense.
You can only deduct expenses you actually incur. Estimates or approximations of expenses won't fly with the IRS.
And hang on to the records for three years after you file your return.
A caveat for leased vehicles
If you lease your vehicle, be aware of a specific requirement when choosing your method. If you deducted actual expenses in the first year you used your leased car for business, you will have to use this method for the entire lease period. You won't be able to switch to the standard mileage method.
Examples of the standard mileage and actual expenses method
You drive your car for business. And in 2020 you drove 18,000 miles total with 12,000 miles for business use.
Your actual expenses for 2020 were:
- Fuel - $6,525
- Insurance - $2,200
- Maintenance/oil changes - $2,350
- License/registration fee - $230
- Depreciation (based upon tax software calculation) - $3,500
- Interest paid on car loan - $2,000
Total expenses: $16,805
Deduction under the standard mileage method
Your deduction using the standard IRS rate for 2020 which was $0.575 per mile would be:
12,000 miles * $0.575 = $6,900
Deduction under the actual expenses method
Your deduction under the actual expenses method would be:
12,000 business miles / 18,000 total miles = 66.7%
$16,805 expenses * 66.7% = $11,203
So... which option saves more money?
In short, using the actual expenses option for income tax purposes is better for high mileage drivers. If that's you, keep detailed records and receipts to claim your maximum deduction. Using expense tracking software like Keeper Tax reduces the hassle. You'll get an annual summary report with all your vehicle expenses. Combined with your mileage log or mileage app, you'll have everything you need.