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Documentation to claim car expenses

If you have a car and you have a business, it’s highly likely that some of your driving is for business and can become a legitimate business expense deduction. You rack up miles as you drive to client meetings, pick up supplies, deliver products, projects or presentations, meet with vendors, zip through the bank’s drive-through window, stop by the post office or make that last-minute speeding dash to the latest FedEx drop-off box.

Of course we use our cars for business, but that pesky IRS wants some kind of record to substantiate the business use. If you're like the rest of us, you're always meaning to keep better notes but, somehow, the car gets littered with bits of scrap paper, backs of receipts, or McDonald's wrappers serving as your official mileage "log".

Document daily as you drive
The trick to being able to prove your deduction is to write down the miles you drive for business as you drive them, otherwise it’s a tough challenge to convincingly recreate history after the fact.

If you’ve kept ongoing records, it’s easy to total your business miles at year’s end and -- voila! -- you’ve got a deduction. Maybe even sizeable tax savings! Even if most weekdays you only drive about 30 miles for business, multiply that x 5 days/week x 50 weeks/year; you will have driven about 7500 miles for business this year. At the IRS allowed rate for mileage, which is roughly 40 cents a mile, you can deduct $3,000.00! (Note, the actual IRS cents-per-mile figure changes a little each year, but for rough estimating 40 cents is a good round number.)

Your most favorable deduction method only becomes obvious at year’s end
At the end of each year, you can choose which way you want to take the tax deduction for your business mileage: the standard cents-per-mile rate (as set by the IRS each year); or deduct the actual car expenses for tax purposes. Some years the per-mile rate will work out best for you; other years (like when you had huge repair costs), you may get a bigger deduction by deducting the business percentage of actual expenses.

Trouble is, you won't know until after the year is over which way you'll want to figure your deduction for that year. So record your odometer reading at the first of each year -- then at year-end you can subtract the prior year's reading to see how many total miles you put on each vehicle each year. At tax time, you or your omniscient accountant can then figure the math for your deduction using the records you've so diligently kept.

Where do your business miles start?
Read the “Car Expenses” section of IRS Publication 463, Travel, Entertainment, Gift and Car Expenses for detailed examples, but in general, you can’t deduct commuting -- driving from your home to where you start your work day -- as business miles, unless your home office qualifies as your principal place of business.

What does the IRS want to see?

  • How many total miles did you put on each vehicle you drove for business last year?

  • How many of those miles were for business, as compared to the number of personal miles? (This will show the business percent of the total miles driven.)

  • How many miles did you drive from business destination to destination? (The IRS wants some real numbers, not just a vague guess of the total.)

  • What was your business reason for driving to those destinations? (Like to meet with client Bill Jones at XYZ Corp or pick up supplies at ABC Discount Store.)

  • What other business expenses (such as parking) were related to your trips?

And record it “timely”
In the Recordkeeping section of Publication 463, Travel, Entertainment, Gift and Car Expenses, the IRS stresses that they want “Timely-kept records”...with “the expense or business use recorded at or near the time of the expense or use” supported by “sufficient documentary evidence”.

That being the expectation to meet, you’ll have to train yourself to jot down mileage history as you drive it. Once you get the tools in place and make it a habit, the task won’t seem so onerous.

Some people add mileage notes to their daily planning diary, but if your planner’s so crowded that your mileage notes aren’t clear, then use another log. Unless you’ve been able to set up your PDA to accept the odometer readings and “business reason” notes per destination, your best bet is the basic pencil and paper method.

Here’s a mileage log form to make it easy
We’ve created a “capture it all” mileage log you can print and use. Just letter-fold it, add pencil and keep both handy in your car visor. We suggest you print this log on stiffer-than-usual stock, or back with a piece of cardboard for easy writing.

Add your notes about what you spend on parking right there on your mileage record. Anyone who pays for parking in any big city knows this expense can really add up. (But, parking tickets are not deductible as a business expense -- sorry!)

Mileage log form (one-page pdf)

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