One of the most popular questions we get asked is about vehicle costs, and whether they count as business expenses. While, as an owner, it seems natural to include vehicle expenses as a cost of doing operations, the best practices can be more complicated. In order to maintain the best possible tax position, mileage should be made a priority for owners.
Personally or Company Owned?
The easiest question to address is whether the vehicle is owned personally or by the business. Whose name is on the lease? Which entity pays the payments? If the car is owned personally, the costs should all be captured personally.
Additionally, which entity gains the most benefit? If the vehicle is used occasionally to meet clients, but is mostly used to drive the family around, commute to school or work, and few business-related trips are recorded, the vehicle should remain on the personal side. It is very hard to justify a vehicle in this situation as being a company vehicle. On the other side, if the vehicle is used in the majority for business related trips and meetings, and is only occasionally used for personal drives, it could be worth it to look into claiming it as a business vehicle, or purchasing the next replacement car under the business name. This second scenario is more feasible if the owner owns multiple cars that can be partitioned in that way.
IRS Mileage Policies
In 2017, the IRS Mileage Reimbursement Rate is $0.535/business mile driven. This means that, for every 100 miles driven, $54.50 can be added to your books as mileage expense, ultimately lowering your Net Income, and thusly your overall tax burden. This rate, however, is only for business related miles driven. An owner’s commute from home to the office is not a business trip. The IRS stipulates that an employee’s “reasonable commute” must be counted towards personal commuting miles, not business miles. Once the owner is at the office, any trip to a business meeting, coaching session, networking event, or similar, can be tracked and recorded as business miles. However, the last trip ending at home must be commuting miles.
Example – Fuel vs Mileage
Say an owner drives 15,000 business miles in a year – This high number of miles could be appropriate for a traveling notary, a real estate agent, or someone else who drives to meet clients on a regular basis. The average gas price in Washington as of May 2017 was $2.861/gallon, and the average fuel economy for 2016 was 24.8 miles/gallon. If we calculate a per mile gas price using these figures, we get an average price of $0.115/mile. At 15,0000 miles, calculated at estimated actual fuel prices, you are looking at a total fuel expenses of $1,725.00. If we calculated 15,000 miles at the IRS rate of $0.535, we get a total fuel expense of $8,025.
Mileage as the Winner
The IRS mileage rate is designed to also take into account an average, per mile maintenance and repair cost. While you could, theoretically exceed the mileage calculation amount with actual repairs, it is highly unlikely. The bottom line is that you should track all your business miles throughout the year to better your tax position.
Mileage Tracking Resources
Beyond the classic paper methods for mileage tracking, the bourgeoning world of FinTech (Financial Technologies) has given us more cloud-based resources than ever before. From cloud accounting software, to receipt management, to expense tracking, we are in a new age of solutions. For instance, Intuit’s Self-Employed Quickbooks version has a mileage tracking module built into the app. It will automatically track trips for you.
However, if you are at a point where the self-employed version of QBO is not robust enough, we recommend MileIQ instead. MileIQ is a Microsoft acquired product that, similarly to Intuit’s module, will use the GPS to automatically track when drives are happening, and will store each trip for the owner to sort into business and personal miles later. Their dashboard makes sending mileage reports simple, as well as gives the user some basic analytics. The most motivating one is that the app will track the dollar amount of the total business miles driven, so you can see how much expense you have built up so far.
To best effect your tax situation, use an easy, reliable tracking method to keep records of all business-related mileage. This should be just one of many business expenses that you keep track of, as an owner. It is important to take the correct deductions for vehicles, advertising, services, and other business related expenses, while making sure to properly separate between personal and business activity.