This article has been reviewed by tax expert Erica Gellerman, CPA.
Small business owners need all the help they can get when it comes to tax deductions. If you’re like most entrepreneurs, you log every expense all year long as a way to maximize your deductions. This includes things like the business use of your home, rent payments on a brick-and-mortar storefront or office, cost of goods sold, the cost of the previous year’s tax preparation, materials and office supplies, business phone and mailing expenses, and interest paid on business loans.
But, you may be overlooking an important deduction that you contribute to nearly every day— the miles you drive. Here’s why small business owners should pay attention to their mileage deduction.
What Are My Miles Worth?
You can deduct 57.5 cents for every business mile you drive in 2020. That may not seem like a lot per mile but it really adds up over the year. It becomes especially useful when you add this deduction to all your other business expenses for the year.
To illustrate, if you drive 20,000 business miles, your mileage could be worth a $11,500 deduction.
What Qualifies as Business Mileage?
Confused as to what really qualifies as business mileage? Work with your tax professional to verify what counts in your business, and think about the following:
- Do you ever travel from your primary place of business (including your home office) to client locations?
- Do you drive to pick up materials or office supplies for your business?
- Do you drop items off at the post office for your business?
- Do you drive to conferences or other professional events?
- Is a run to the bank or other errands necessary for your business?
Remember that commuting from your home to your office is not a deductible expense, nor are those miles driven for your personal errands. It’s important to subtract those trips from your total daily miles if you’re combining business and personal trips.
All the miles you cover doing the things listed above are probably tax-deductible, but the trick is remembering to record them in detail so you’re not stressed come tax time. Detailed records are vital because the IRS does not accept estimates when it comes to mileage deductions. If an auditor comes around looking over your tax return, you’ll have to produce proof for all of your deductions, including business mileage.
What Documentation Does the IRS Require?
To satisfy the IRS documentation requirement for deducting business miles, you need to track your mileage clearly and accurately. You must also document the date, time, destination, and business purpose of each trip. At the end of the year, you should have a record of all the business miles you put on your vehicle as well as the total number of miles driven that year (business and personal combined). The easiest way to keep track of your total miles driven each year is to record your odometer reading on the first and last day of the year.
When you’re traveling out of town for business, of course, you should keep detailed records of all your expenses, not just transportation. Depending on the circumstances, you may be able to deduct at least part of the costs of lodging, baggage, meals, laundry, and tips, as well as taxi rides between the airport, your hotel and your temporary place of business. Keep your receipts (digitizing them is a good idea) and note how each expense relates to your business or trade.
If your trip is mostly personal, with a bit of business activity thrown in, you can only deduct the business-related expenses. Remember that you should have proof of all your expenses in the form of documentation such as itemized receipts.
How Many Business Miles Can I Deduct?
There is no limit to the number of business miles you can deduct on your taxes. The more business miles you deduct, the more you can lower your taxable income and potentially reduce the amount of taxes you pay.
Although there’s no true limit, it’s important to only deduct what you have documentation for. The IRS typically will flag egregious mileage deductions, landing you face-to-face with an auditor.
Create a System for Mileage Tracking
Because you’ll need such detailed reports in case you get audited, you must develop a solid plan for recording your mileage right away. One way to do this is to keep a small notebook and pen in your glove compartment and jot down all the required information each day. This is easily the cheapest method, but it requires you to remember to log each and every trip.
Mileage tracking apps automate the record-keeping process so you don’t have to remember to write down every business-related mile by hand. Although this may come with a price tag, it’s worth considering if you deduct a lot of business miles each year.
The Bottom Line
No matter how busy you are, it’s worth your time and effort to track your business mileage. Having well-documented business expenses will keep your tax professional happy and will save you pain and frustration should you ever be audited.
Once you have mastered the habits of keeping accurate business transportation records and organizing your receipts to back up your claims, don’t stop there. Good record-keeping will serve you well in all aspects of your business and will help you remember to follow up on leads, file paperwork on time, meet deadlines, and keep appointments. At the end of the day, keeping accurate records makes you a more professional business owner.