Recordkeeping for Car Expenses
As a business owner, if you or one of your employees uses a car you own or lease for business purposes, you may be able to deduct certain car expenses. There are two methods you can use to determine your deduction amount which requires different documentation:
Standard Mileage Rate
The standard mileage rate requires that you keep track of mileage used for business trips. If you use a car for both business and personal reasons, you will need to record the total miles driven for the year and the total miles used for business. Once you figure the business mileage for a given year, you will multiply it by the standard mileage rate to determine your deduction amount.
In 2021, the rate is 56 cents per mile. Therefore, if you drove 5,000 miles for business this year, then your deduction amount would be $2,8000 (0.56 cents x 5,000 miles).
To track your business mileage, you should keep a mileage log that includes the following information for each business trip:
How many miles you drove
The business purpose for a trip.
You may use a physical journal for this or there are also apps where you can track your mileage. You should update this log at or near the time of the trip to ensure accurate and complete records. In IRS Publication 463, they provide an example of a Daily Business Mileage and Expense Log:
If you would like to use the standard mileage rate, you must do so in the first year you use your car for your business. After the first year, you may choose to use the standard mileage rate or actual expenses method depending on which is more beneficial for you.
The actual expenses method provides a deduction based on the expenses you had for the car in a given year. This requires more extensive recordkeeping because you must have documentation for every expense you claim as part of your deduction. Documentation must include the cost, the date of the expense, and what it was for. This may include receipts, canceled checks, or bills for:
Gas and oil
You will also need to know how many miles you drove for business and non-business use. Once you figure the percentage you used the car for business purposes, you will multiply it by the total car expenses for the year to determine the deduction amount.
Which Method Should I Use?
The method that is most beneficial to you may vary based on the year. Generally, if you drive a lot for work and have low expenses, the standard mileage rate will give you a bigger deduction. However, there are some businesses that may not be able to use the standard mileage rate, such as those who operate five or more vehicles at the same time. For cars that have high operating costs and less drive time, the actual expenses method may be better. If you're not sure which one will be most beneficial for your business, it's a good idea to keep records for both methods so you can determine at the end of the year which one will give you the higher deduction.
Disclaimer: This post is meant for informational purposes only and should not be taken as legal, business, or tax advice. Please consult with your accountant or bookkeeper for more information based on your specific situation. For more information, please read through the following resources: