The biggest thing that people fail to do in documenting their deductible expenses each year is keeping a mileage log for their vehicle used in their business.
In the event that your tax return is flagged for review (or audit in more common terms), the very first request the reviewer will ask is for your mileage log, if you’ve deducted vehicle expenses.
If you don’t have it - ALL of your deductions for that vehicle go “poof”. And, now you owe the tax on the income you tried to write off plus the penalties and interest.
The rules for auto deductions are pretty straight forward - if you lease, there’s one set and if you own, there’s another set. Both are based on the percentage use of that vehicle to produce your income.
If you have only the one vehicle, you cannot reasonably try to claim 100% business use.
If you do NOT lease, then for most folks you have to deduct mileage based on the IRS mileage rate. The rate can change mid-year, so keeping a record of WHEN you drove, how much you drove and for what income generating purpose is very important.
If you’re a mileage based deduction type of person, your gas receipts just don’t matter. Neither do your insurance or repair receipts. Only your mileage (based on the log) plus registration taxes, tolls and parking, and interest on your vehicle loan (one no one remembers) are deductible.
If you have a W-2 job (meaning, you’re not self-employed), and you are required by your employer to use your personal vehicle for work purposes, your ability to deduct is based on whether they reimburse you or not, and whether your reimbursement is included in your W-2 amount or not.
If you are not reimbursed, or if the reimbursement is included in box 1 of your W-2, you can deduct your mileage on form 2106.
Since we’re only two weeks into 2011, you could start keeping a mileage log NOW for the new tax year. Your sixty minute tax task is to do that for yourself.
You can use any mileage log format. Just type in “mileage log” into any search window and you’ll find them for free. Some smart phone applications exist for keeping the log, but the most important thing is to use it each and every time you take a trip for income generating purposes. Since we have had only about eight business days in the New Year, you can set up your log, enter in the trips you’ve already made in 2011 and have things ready to go in an hour or less.
Your FIRST trip of the day from home to where you generate income is NOT business purpose - it’s commuting, just as your LAST trip of the day from where you generate income to home is not.
If you have a W-2 job, any travel between your home and workplace is commute mileage. Only travel from your place of work to an offsite destination required by your employer (a seminar, for instance) is deductible.
If you have more questions about vehicle deductions, let me know!