From time to time, it’s nice to recap IRS requirements and ensure our record keeping methods are up to date in the event of IRS review. One of the areas often looked at by the IRS is the deduction of business related car and truck expenses. In order to deduct car and truck expenses, the IRS states “a taxpayer must have ordinary and necessary costs related to one or more of the following”:
- Traveling from one work location to another within the taxpayer’s tax home area. (Generally, the tax home is the entire city or general area where the taxpayer’s main place of business is located, regardless of where he or she resides.)
- Visiting customers.
- Attending a business meeting away from the regular workplace.
- Getting from home to a temporary workplace when the taxpayer has one or more regular places of work. (These temporary workplaces can be either within or outside taxpayer’s tax home area.)
It’s important to remember that expenses related to travel between a person’s home and regular place of work are commuting expenses and not deductible.
Once you have determined whether or not your auto expenses are business related, you have two options for determining your allowable business deduction: Standard Mileage Rate or Actual Expenses.
Standard Mileage Rate
The standard mileage rate can be used in place of actual expenses. The standard mileage rate is adjusted annually by the IRS to reflect changes in the cost of operating a vehicle. If a taxpayer wishes to use the standard mileage rate for a leased vehicle, it must be used for the entire lease period. In other words, a taxpayer must use the standard mileage rate for the first year a vehicle is available for business use in order to use the standard mileage rate in subsequent years.
Record keeping note – To claim the standard mileage rate, appropriate records would include documentation identifying the vehicle and proving ownership or a lease and a daily log showing miles traveled, destination and business purpose.
Actual car or truck expenses include:
If the vehicle is not used 100% for business use, then the total expenses must be prorated between business and personal.
Record keeping note – For actual expenses, a mileage log helps establish business use percentage. Taxpayers should also retain receipts, invoices and other documentation to show cost and establish the identity of the vehicle for which the expense was incurred. For depreciation purposes they need to show the original cost of the vehicle and any improvements as well as the date it was placed in service.
The data for this article and more detailed information can be found at the IRS website.