TIP #1: Get Free Gas for Your Car
Do you use your car for business? Do you call on customers or drive to appointments? Well let me show you how with just a little bit of planning you can get your gas for free, courtesy of the IRS.
In the US, there are two ways the IRS allows you to deduct your vehicle. The easier and more conservative one is called the IRS method. (The other method, called the actual method is discussed at the end of this section.)
IRS Method (the easiest one):
The government gives you a $0.54 deduction (2016 rate) for every mile you drive for legitimate business purposes (defined later in this article).
Example: (I am going to make a few assumptions)
- You drive a car that gets 20mpg
- So if you drive 20 miles you will use 1 gallon of gas.
- Gas costs an average of $3.00/gal
Conclusion: it costs you $3.00 to drive 20 miles.
If you drive those 20 miles for a legitimate business purpose, then the IRS gives you a deduction of $10.80 (20 miles x $0.54). Or in other words it lowers the amount of income you have to pay taxes on by $10.80.
To find out how much that saves you in taxes at the end of the year all you need to do is multiply it by your tax bracket. We will use an average tax bracket of 35% (includes state and federal) for this example. That means that you saved $3.78 on your taxes ($10.80 deduction x 35%).
Conclusion: You actually made $0.78 net cash driving 20 miles!
Over time that can add up to a lot of money. If you drove 15,000 miles you would save nearly $3,000 for the year. Can you see that when you are using your car for business it costs you nothing? You are getting your gas for free.
How to Qualify
Contrary to popular belief, the IRS can be pretty reasonable. They offer you a deduction, BUT they want you to keep a record of all your business mileage for which they are giving you credit for at the end of the year. Sounds pretty fair.
What Proof do They Require?
- The total mileage of the trip
- The date of the trip
- The reason it should be considered business-related mileage
Total mileage: 15 miles
Business purpose: Met with Jim Smith to discuss new order
For decades smart business people kept a clipboard in their car so they could write down this information every time they got into their car. Otherwise, they would forget and end up guessing at the end of the year which would open them up to tax fraud. Recording mileage is tedious, but well worth it.
Technology Has Made it So Much Easier
Taxbot allows you to track your mileage using the GPS in your smartphone. All you have to do is hit start trip when you leave and end trip when you arrive, and the mileage is recorded for you. The app asks you to fill in all of the required information, and you are tax compliant. www.taxbot.com
The Actual Method
There is another method for deducting your car called the actual method. It is calculated just like its name implies. At the end of the year simply calculate the total costs for driving your car. Then you multiply that sum by the percent of the miles you drove for business compared to the total mileage.
Notice you still have to keep track of your mileage in this case too.
Now remember that a deduction doesn’t equal cash. Let’s assume you are in the 35% tax bracket.
Your cash saved at the end of the year is 35% of $10,011.24 = $3,503.40
What is Considered Business Mileage?
In both the IRS and the actual method of deducting your car, you need to keep track of your business mileage. The IRS DEMANDS that you keep a mileage log.
When you sign your tax return you do so under “penalty of perjury” that you have the back up information to prove it!
The IRS does not mess around when it comes to automobile deductions. It is the #1 audited business deduction. It can also be one of the most lucrative ones. So let’s talk about what is considered business mileage.
First you need to answer one question:
Is your principal place of business your home or is it an office that you commute to? If you are not sure check, out chapter 4 on home office deductions.
Option 1: Home Office as Principal Place of Business
If your home is your principle place of business (as defined in the section on home office), then all business stops from your home are deductible! So trips to the bank, clients, office supply store, etc. are all deductible.
There is one major exception. If you have a regular job in addition to your own business then the direct commute to your job is NOT deductible.
Option 2: You Commute to Your Main Office
If your principal place of business is an office other than your home, then a direct commute from your home to your office is not deductible. However, with some planning you can turn it into a deduction by making some temporary business stops on the way to the office.
DEFINITION: Temporary business stop: A stop that you do not make regularly and that you will not be visiting frequently for more than a year. Since you are expected to go to the bank or post office regularly for years to come this is not a temporary business stop. However, visiting a client or prospect would be considered a temporary stop.
So Let’s Go Through a Few Examples:
Example 1: You go from your home to meet a prospect somewhere other than your office, which is your principle place of business. Then you go to stops A, B, and C (all related to your business) and then into the office. All of your mileage would be deductible since meeting the prospect was a temporary stop.
Example 2: You leave your house and go to the post office. Then you proceed to A, B, and C and then to the office. Your trip to the post office would not be deductible because it’s a regular business stop and not temporary. However, all the mileage after that would be deductible.
Trips Outside Your Metro Area
If you make legitimate business stops outside of your normal business area, then all round-trip mileage is deductible as long as you will not be there more than a year.
Example: You live in Denver but attend a convention in Salt Lake City. All the mileage to that convention would be deductible since it’s outside of your normal geographic area of business. However, if you were stationed in Salt Lake City for a project that is expected to last more than a year then the mileage wouldn’t
Turn Personal Mileage Into Business Mileage
Successful business owners know that there are opportunities everywhere for those willing to find them. You might want to learn to mix business with pleasure. For example, let’s say you want to drive across town to visit your mom.
Visiting your mom is not a business trip. However, ask yourself, “do I have a client or a prospect near my mothers house?” If you do, set up an appointment and do a little business on the way there or back. The mileage to and from the client could now become deductible. So, only the portion of the trip from the client to your mom’s house is personal. You just saved some money!