Business Mileage – The Holy Grail of Tax Deductions

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    Business Mileage - The Holy Grail of Tax Deductions

    Today’s classic is republished by White Coat Investor. You can see the original here.

    Enjoy!


    One of my preferred tax deductions is the deduction of professional miles. If you drive your car for business, you can deduct 56 cents [2021] for every kilometer driven. That’s pretty generous in my opinion, considering that $ 4 a gallon of gasoline for a car that gets 30 miles per gallon will cost you 13 cents a mile. Of course, there are other expenses associated with driving, including maintenance, repairs, depreciation, and insurance, but give me a break. 56 cents is great.

    How much is it worth

    Imagine you own a car worth $ 2,000. Now assume a marginal tax rate of 40%. How many kilometers do you have to drive by car to pay for the car? Answer – 9.091. Many entrepreneurs drive twice as much every year. Even if you deduct 13 cents a mile for the gas, it’s only 11,905 miles to pay for the car. Even a $ 2,000 car will last 12,000 miles. The best thing about this trigger is IMHO that they are giving it to you for something you have to do anyway. So it’s basically free money.

    How it works?

    This is how the trigger works. This is from IRS Publication 463 [2021].

    The basic rule is that you can’t deduct your commute, but everything else can be deducted. For example, if you work in two hospitals, you cannot deduct the trip to the first hospital or the trip home to the second hospital, but you can deduct the miles between them. You must be a business owner too – paid with a 1099 or a K-1, not a W-2. Employee unreimbursed expenses have never been more valuable as they were subject to the 2% lower earnings limit in Appendix A. Even that went away from 2018 to 2026, with the exception of reservists, musicians, and multi-employer actors, state / local fee base government officials, disabled employees (costs related to their disability), and educators (up to $ 250 per year).

    My scheme thwarted

    So in the beginning I had this great scheme. Since I have a home-based business (this blog), I had the plan to “commute” down the stairs to the home office, then to go to the hospital and back to my home office and then again to commute upstairs the stairs. Unfortunately, it turns out that you can’t do this. If one of your business locations is your home office, there is an additional requirement. Both jobs have to be in the same industry, which is not the case with me. It’s a shame because it would be worth at least a few hundred dollars a year to me.

    I’ve managed to earn a few miles for every business, but nowhere near the miles I drive between my home and the hospital.

    Different mileage

    There are other miles that you can deduct as well. Kilometers driven for a charitable purpose are deductible at 14 cents [2021] a mile. Miles for medical care (received, not given and subject to a minimum floor of 10% in Schedule A) and moving are deductible at 16 cents [2021] a mile. It’s not quite the deduction of business miles, but it’s better than a kick in the teeth.

    Actual expenses

    Instead of the 56 cents, you can deduct your actual business miles. But you will have to spend a huge amount on your car to beat that 56 cent figure. Besides, who wants to keep track of all of this? It’s bad enough having to keep a logbook. But if you drive a fancy Audi or Tesla, or lease pretty much anything, it might be worth the effort. Depreciation, auto loan rates, and lease payments are certainly some of the real expenses.

    The mileage log

    If you are checked, you will need to present the logbook that you are supposed to keep. This is meant to be kept at the same time (i.e. you write it down when you drive the miles and don’t reproduce it later). You need the date of the trip, the mileage of the trip (preferably with the start and end mileage) and the purpose of the trip.

    Can my company pay for my car?

    Many people have heard that your company can lease or even buy your car and it works fine. Unfortunately, a lot of people abuse this and their practice would never stand up to an audit. You can’t buy and pay for the car from your company (essentially paying for your transportation costs in US dollars before taxes) and then use it in person. It is to be used for business purposes ONLY. Again, commuting is NOT a business expense. Only business use is a business expense, the rest is taxable income for you. If you have 100 percent business use of the car, expect an exam. Almost nobody uses their car ONLY for business purposes. Again, you need to keep a mileage log for both business and personal use and then multiply your actual expenses by the ratio of business miles to total miles.

    Brand new trucks and large SUVs are used more than 50% for business purposes (defined as a vehicle with a gross vehicle weight rating [not curb weight] more than 6,000 lbs – a Chevy Suburban is hardly suitable) are entitled to special depreciation rules. Basically, you can deduct up to $ 25,000 in depreciation in the year you buy it, instead of just 56 cents [2021] a mile, although it is reduced by non-business use. In addition, all vehicles are currently entitled to a 100% bonus depreciation for new and used vehicles (if they are new) until the end of 2022. Again, this is reduced by non-business use.

    The bottom line is that business miles can be a fantastic business deduction, especially with a cheap car. Just think about the most important rules – only business miles count as business expenses and commuting is never business miles.

    What do you think? Do you deduct business miles? Any tips on how to maximize this deduction? Comment below!




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