Business mileage is one of those business tax deductions that should have a "Caution" sign on it. If you want to take the deduction, you must be able to prove it. And there's a specific way to do that.
Some business owners and employees who must travel in the course of their jobs keep excellent records of business mileage. But if you don't keep these records the right way, you can't include the expense on your business taxes and you could miss out on a large tax deduction.
Worse, you might take the deduction anyway and get audited.
The Two Ways to Keep Business Mileage Records
The IRS wants "timely and accurate" records. It expects you to keep a "daily log showing miles traveled, destination, and business purpose." The easiest way to do this is to stick to an "at-the-time" log. You will need four pieces of information for every business trip: the date, your odometer reading at the start and finish, and why you are making the trip.
Two ways to track mileage:
- The Logbook method.
- A mileage app (Hint: This one's easier)
If you use the logbook method, you'll need to record the information about the trip at the time it happens. Include the name of the person and why you are traveling to this location. Write down the point at which you began driving there. Include the address or some information about your destination.
You can record the actual mileage - where you started and ended - if you want, or you can add this in later from a map app on the Internet.
For both tracking methods, the most important thing to remember is that you must be able to show that you recorded the information at the time of the trip. You can't wait until the end of the tax year to "catch up!"
Using an App to Track Business Mileage
If you are permanently connected to your smartphone, numerous apps are available that will record your mileage for you. They'll even separate your business miles from your personal miles. If you use the same vehicle for both business and personal use, you must also record your overall mileage at the beginning and end of the year.
Be sure to record information about business purpose on the app as soon as possible after the trip.
Keeping Records for the Actual Expense Option
The IRS allows two different methods for deducting driving expenses: Actual expenses or the IRS standard mileage allowance. If you are using the standard allowance method, you just have to show the mileage, date, and business purposes. There are advantages and drawbacks to each, and there are also some restrictions on reporting actual mileage.
If you are using actual driving expenses, you'll need to keep receipts for all driving expenses, including gas, maintenance, and insurance. Then you multiply these expenses by the percentage of total miles used for business. If you are using a mileage app, it does the calculating.
For example, if you drove a total of 24,000 miles in a year, and you can prove 18,000 for business purpose, you are driving 75% for business. You would then multiply your total actual driving expenses by this percentage to get the amount to use for the expense deduction.
There's a common misconception that if you keep track of actual expenses, you don't have to track mileage. But you can only deduct business expenses, so you still have to track mileage to separate the business miles from the personal miles.
Reporting Your Mileage on Your Business Tax Return
The next step is to include this information on your business tax return. The specific way you include this information is different depending on your business type.