I’m often asked by dog pros about what types of business expenses are deductible on their tax returns, but those related to their vehicles seem to cause much confusion. Often questions arise like, I use my car for both business and personal, How much of my insurance can I deduct? Or, I drive 50 miles roundtrip from my home to the doggie day care facility I own, how much can I deduct for the gas and tolls I pay to get there? Or because I’m driving around so much more doing in-home training I had to buy new tires for the car. Can I deduct the cost of them? Let’s take a look at some of these and help clarify what is and what’s not tax deductible and how your record keeping impacts that.
First and foremost… the records you keep are the most important factor in determining the tax deductible portion of your vehicle’s expenses. They don’t need to be pretty or even very sophisticated. They just need to be accurately maintained. For example, a handwritten notebook or log is a completely acceptable record. You don’t need to have a printout from a fancy computer program or even an Excel spreadsheet in order to document the miles driven for business purposes to justify the expense. But whatever form of documentation you choose, you must at a minimum keep a record of these three things:
- the total miles driven;
- the miles driven for personal use and;
- the miles driven for business use.
In my experience, the most convenient form for dog pros to use is a simple handwritten log book that they keep in the car at all times. Create your own by dividing a sheet of paper into six columns with the following headings:
- Odometer Start
- Odometer Finish
- Number of Miles
- Business Miles
- Personal Miles
When you get in the car, note the date, odometer reading, when you get to your destination note the odometer reading again, record the number of miles driven and then place the number of miles into either the Business Miles column or the Personal Miles column. Do this each and every time you get in the car. If you do this every day, at the end of the year you will have a complete and accurate record of the miles that were driven and the purpose of those miles which will be used to calculate the amount of your tax deduction.
How much can I deduct?
There are two different methods for determining the amount of the tax deduction. In order to maximize the tax benefit associated with the use of your car for business purposes, we need to compare the two methods to determine which method will give you the greater deduction.
- The standard mileage method
- An allocation of actual expenses
The mileage method simply multiplies the number of business miles driven by a pre-set amount the IRS determines every year. For 2014, the amount is increased to 56 cents per mile. So you can see, in order to calculate the deduction, all you need to do is total the business miles driven and multiply it by the mileage rate. Easy? Yup! For most of you with vehicles that are more than a few years old or those of you putting on a ton of business miles each year traveling to and from client locations or events, this method will likely result in a larger deduction than the next, but we need to go further and calculate the expense using the second method in order to compare the two.
To calculate the amount under the second method, we still need the log book but in addition, we need to have records of the actual amount spent on:
- Garage Rent
- Repairs and Maintenance
- Property Tax
- Rental Fees
- Interest (if you are financing the car)
In addition, your accountant will compute depreciation on the car which is another expense that you can deduct on your return if you use this method.
Again, record keeping is paramount. In my experience, clients that use a debit or credit card set up for the business is the easiest way to track gas purchases and the like. If however, you are of the George Costanza variety and want to keep receipts of each and every purchase in your wallet, so be it, but there are easier ways of keeping records (that won’t blow away on a windy day).
How do I determine if mileage is business or personal?
Now that we know what to record and how to record it, questions may still arise as to which column the miles should be recorded. Are these business miles or personal miles? To help keep them straight, here are a few examples:
- Commuting miles are personal. Travel from home to your regular place of business is considered commuting.
- Travel from your regular place of business to a client is business.
- Travel to a dog event in which you are promoting your business is business.
- Travel to pick up the kids at school from your regular place of business and then back to work would be considered personal.
- Travel to the store to buy 6 foot leads you use in class would be considered business, but travel to the grocery store for food (unless you were making dog treats for your client) is personal.
- Travel from home to pick up or drop off a dog for boarding would be considered business.
Remember… There will be times when using good judgment and reasonableness for situations in which the mileage or the expense itself could be considered business use, personal use or a combination of them both. Keeping good records and discussing them with your tax professional will help guide you through this process.
IRS Circular 230 Tax Advice Disclaimer: Pursuant to requirements related to practice before the Internal Revenue Service, you are hereby advised that any written or electronic tax advice contained herein (including any attachments, enclosures, or other accompanying materials) was not written or intended to be used, and cannot be used, by any taxpayer for the purposes of (i) avoiding penalties that may be imposed under the U.S. Internal Revenue Service Code or any other taxing authority or (ii) promoting, marketing or recommending to another person any tax related matter.