Small business owners may use their personal vehicles for business driving. This is perfectly advisable from a cost-saving perspective, and it’s permissible for tax purposes too. The only catch: in order to deduct the cost of business driving, you need to substantiate business use of the vehicle. The tax rules are very strict on what this means. There’s a right way and a wrong way to do it.
Records must be contemporaneous
This means required information must be noted in a logbook, app, or other record at or near the time of each business trip in the vehicle. In one case, a contractor created his mileage record solely for use when he was audited; the notations weren’t made contemporaneously with the business use of his Mercedes. What’s more, his record was a calendar with minimal notations about business appointments; not good enough, as you’ll see.
It’s not sufficient to just jot down the date and number of miles driven for business for tax substantiation purposes. The IRS says you need to note:
- The date
- The destination (city, town, or area)
- The business purpose
- The odometer reading at the start and finish of each trip (total miles for the trip)
- The expenses—type (e.g., oil, gas) and amount, unless the IRS standard mileage rate is used (explained below).
If you opt to deduct the IRS standard mileage rate instead of actual expenses, you still need to keep a record of all the information other than expenses. For 2022, the standard mileage rate is 58.5¢ per mile for business driving in the first half of the year and 62.5¢ per mile in the second half of the year. Again, using the standard mileage rate does not alleviate you from the requirement of recording all other information about each business trip.
Sampling for record-keeping
Instead of recording information for every business trip in your vehicle, you can keep an adequate record for parts of a tax year and use that record to prove the amount of business use for the entire year. This is referred to as “sampling” and you must be able to show that the periods for which an adequate record is kept are representative of the use throughout the tax year. For example, you drive approximately the same number of miles for business each month throughout the year. If you keep detailed records for the first three months, you can extrapolate your mileage for the full year. Similarly, if you track mileage for the first week of every month, your weekly records can be used to show total business driving for the month.
The IRS gives this example: You use your car to visit the offices of clients, meet with suppliers and other subcontractors, and pick up and deliver items to clients. There is no other business use of the car, but you and your family use the car for personal purposes. You keep adequate records during the first week of each month that show that 75% of the use of the car is for business. Invoices and bills show that your business use continues at the same rate during the later weeks of each month. Your weekly records are representative of the use of the car each month and are sufficient evidence to support the percentage of business use for the year.
Documentary evidence for actual expenses
If you don’t use the standard mileage rate to figure your deduction for the cost of business driving and instead deduct your actual costs, you need to keep receipts, cancelled checks, credit card statements, bills, or other documentary evidence of the cost of expenses related to business use. This is in addition to the mileage record and other information listed above.
Distinguish between business and personal driving
The cost of driving for personal purposes isn’t tax-deductible. You can’t deduct the cost of commuting, which is a non-deductible personal expense. Track the miles starting from your office to any business-related location, such as seeing a customer or vendor, going to the bank or post office, or buying supplies. If your business is home-based, then travel from home to any business-related destination and back again count as a business trip.
Be sure to note that only self-employed individuals can deduct the cost of business driving. Owners of corporations who are employees can’t deduct their costs on their personal returns, but can arrange for reimbursement from their businesses using an accountable plan; this requires the same substantiation. Sure, it takes effort to maintain adequate records of business driving, but it’s worth it. Just figure that if you are a self-employed individual who drives 8,000 miles for business in 2022 (assuming the same miles each month) and you use the IRS standard mileage rate, you can deduct $4,840. That’s not nothing.