Vehicle Deductions for Business Owners: Avoiding Problems with the IRS

The Internal Revenue Service has strict eligibility rules concerning claiming business mileage deductions. If you are paying less tax by itemizing deductions though and use a vehicle for business, you should claim this deduction. However, you need to carefully follow IRS rules to avoid penalties that could trigger the IRS scrutinizing everything you itemize. Your solution is be honest and diligent, and have your tax professional help ensure you properly prepare you records.
There are two ways to deduct vehicle business expenses: deducting actual expenses or using the standard mileage rate.
Should you choose to deduct your expenses, you will need to keep your receipts and a detailed record of all costs related to your vehicle. Then you need to determine what percentage of your miles qualify as business use. If your business use is 60 percent and your annual expenses totaled $5,000, you can claim a $3,000 deduction.
Should you choose to use the standard mileage rate, the rate is 56 percent for 2021. Therefore, if you drove 8,000 business miles and kept proper records, you can claim a $4,480 deduction. However, you need to keep an accurate mileage log that includes the date, purpose, starting point, and destination of each trip. You will also need to list your vehicle’s starting and ending odometer reading for every trip, as well as the starting and ending readings for the year. You do not need to keep a mileage log if using the expense-deduction option.
Audits
Make sure you have kept an accurate log. The IRS says it is adequate to show your log for part of the year to substantiate your deduction claim. But to use a sample, you must prove it is representative of the entire year. You can do that by showing your appointment book. If your appointments reflect your mileage logs, it will substantiate your claims. So, be prepared.
There is more to know about mileage deduction and audits. We recommend you get with your tax professional to make sure you are in the best position should you be audited. For our clients, we offer unlimited complimentary tax planning advice.
Professional Tax Services is a locally owned provider serving over 3,500 local residents and businesses. For more information call 661-259-1967 or visit www.protaxservices.com. Through their complimentary EZ2 Thrive program, they provide unlimited free tax planning advice to their clients.