On December 10, 2014, the Internal Revenue Service announced the mileage rate deduction for 2015. They increased the amount allowed 1.5 cents to 57.5 cents per mile. So how do you calculate and use the mileage rate formula for tax purposes? If you are a new business entrepreneur, you will want to know how to track the miles driven, what is allowed and how to calculate the deduction for tax purposes.
For many new business entrepreneurs, it is important to understand this deduction. It is also valuable to know the compliance requirements and how to calculate this deduction. If you are a typical small business owner, you use your personal vehicle while conducting business operations. So you will want to take advantage of this allowed deduction. To give you an example of the real value involved, let’s look at how much money we are talking about in tax savings.
Let’s assume you drive a total of 8,000 miles for the business during the calendar year. How much money will you save in your taxes? In 2015, you are allowed to take $4,600 (8,000 miles driven X .575 mileage rate per mile) as a deduction against your earnings from your small business. So, you will save the following amount in taxation:
Self-Employment Tax [($4,600 X .153 (tax rate) X .9235 (effective value)]** = $649.96
Federal Income Tax (Assumes a 10% rate) = 427.50
[($4,600 – (1/2 of Self-Employment Tax as adjustment to income tax) 324.98)) X 10% rate]
State Income Tax (Assumes a 4% rate) = 171.00
TOTAL TAX SAVINGS $1,248.46
** Read more about self-employment taxes here: Self-Employment Taxes .
From the above formula, you can see that it is a significant savings. If gasoline costs $3.25 a gallon (yes I know, gasoline is currently running around $2.25/gallon; but I do not expect this price is sustainable throughout all of 2017) and you get 20 miles to the gallon, then you will use 400 gallons of gas in that year for business purposes. At $3.25 per gallon, the actual cash cost for gasoline is $1,300. So you can see that the tax savings covers the cash cost of gasoline for those miles driven for business purposes. So it is to your advantage to track this expense. Why do you have to track this expense?
If the taxpayer fails to track the expense, then he is not entitled to the deduction. This is important to understand. Often taxpayers selected for an audit will have a one or two line item compliance audit. This is often one of the line items selected and you must comply with the procedures to track mileage. Failure to comply means denial of the deduction. So how do you track this deduction?
Your best tool is a mileage log. On the first day of the year, document the odometer reading, and on the last day of the year, document the odometer reading. During the year, document the odometer reading weekly and write in your log where you go, what the business purpose is, and the number of miles driven.
At the end of each month, write down the number of business miles driven out of the total miles driven that month. You should keep all your gas receipts and repairs and maintenance receipts in a zip lock bag by month. That is how I keep my records.
So the question comes up all the time for side trips for personal purposes, such as the occasional stop at the grocery store etc. In general, if the stop is along the path to or from the destination, you do not need to be concerned. However, if you have to go out of your way for personal purposes such going to a doctor’s appointment or to pick up the kids at school; you are not going to be allowed this portion as a deduction. So at the common point of change in your path, this is where the business miles stop and the personal miles begin. You need to be reasonable in your thought process in determining personal miles and business miles driven. The key is document, document, and document!
In addition to the miles driven, keep your receipts for tolls, parking, and special decal fees required. These are separately deducted and are not considered a mileage element of transportation costs. If you pay personal property taxes on your vehicle, the tax is deductible on Schedule A, but only the personal ratio of the total miles driven. This is because the tax is a cost element of the mileage deduction calculation.
Other Important Information
Finally, some business sense to help you. Don’t buy a fancy car just because you get a mileage deduction. You are limited in value for your vehicle. The IRS has calculated that about 22 cents of the 57.5 cents is attributed to the original purchase price of the vehicle. In effect the depreciation aspect.
It does not matter whether you use a $14,000 vehicle or a $25,000 vehicle the 57.5 cents deduction is the same. So from a business perspective, utilize a lesser value vehicle for this purpose. It is just good business sense to keep your operating costs as low as possible. The Internal Revenue Service limits the value of a car to $28,200 and $30,800 for small trucks and vans. If the original purchase price is greater than this dollar amount, then you must use the actual cost method for tax purposes.
In addition, you may use the mileage deduction for up to four cars (and small trucks/vans) at the same time.
The mileage deduction is calculated using the following elements of transportation costs:
- Initial cost of the car (Depreciation)
- Repairs & Maintenance
- Taxes and Licenses
Interest on any loan to acquire the vehicle is formulated differently. You will need this calculation of interest to present to your CPA for year-end tax purposes.
If you document your mileage regularly and act in a reasonable manner in using your vehicle the mileage deduction is a very valuable savings for tax purposes. Follow the directions provided and if you need more help, go the resources page, Business Economics – Resources and look in the IRS section for further information in one of the IRS pubs. Act on Knowledge.
If you have any comments or questions, e-mail me at dave (insert the usual ‘at’ symbol) businessecon.org. I would love to hear from you. If interested in my help as an accountant or consultant, contact me through the ‘My Services’ page in the footer.
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One last note, if you are interested in understanding the basic formula used to determine actual cost to operate a vehicle, I have written an article that explains the entire thought process and formula: Cost per Mile – Basic Formula