Bookkeeping – Vehicle Operations and Accounting (Lesson 60)
The Internal Revenue Service authorizes two different methods to deduct expenses for vehicle operations. The most commonly used method in small business is the mileage reimbursement method explained in Lesson 61. The second method is the actual cost of vehicle operations which is explained and illustrated here.
This lesson explains the fundamental requirements for compliance and accounting purposes the actual cost method. In addition, there are bookkeeping processes with day-to-day activities and monthly recurring entries. This lesson will also explain the best accounting structure along with the documentation process for vehicle operations.
Fundamental Requirements – Vehicle Operations
For any business with five or more vehicles, the IRS mandates the use of actual costs to deduct expenses for tax purposes. If there are less than five vehicles, management may elect the mileage reimbursement method for vehicle expenses when filing the business tax return. Often this mileage reimbursement method exceeds the actual cost method for tax purposes. However, whether the business has one car or 40, the company must still track actual costs for transportation under Generally Accepted Accounting Principles (GAAP) and for IRS documentation compliance.
In essence, no matter how many vehicles are owned, the bookkeeper must record all costs in an organized manner. This meets several fundamental business purposes:
1) A full understanding of actual costs to operate each vehicle;
2) Comply with taxing authority guidelines;
3) Fulfill the requirements of auto policies for business; AND
4) Safe operations for employees and the public.
Each of these are elaborated further below:
Actual Costs of Operation
The primary purpose of tracking actual costs is to assist management in understanding the cost per mile of operations per vehicle. Breaking down the costs by vehicle helps management with analyzing value for different types of vehicles and overall financial performance. Business is about understanding the cost of the service/product provided to price this service appropriately. Transportation is one of those costs.
Tax Authority Compliance
The various tax authorities require costs broken out by respective groups as follows:
1) Repairs and Maintenance
4) Taxes (Property)
5) Registration and Compliance (Tags, Stickers)
8) Capital Costs – Depreciation
9) Capital Costs – Interest
In addition, the state motor operation boards or division/bureau of motor vehicles (D/BMV) require mileage reporting on an annual basis. This is a fundamental requirement for the IRS too.
Business auto policies are always more expensive than individual or family policies. Furthermore business auto policies are more restrictive in order to control costs associated with claims. They too want mileage reports and in some cases maintenance records. The insurance company wants to make sure the business is operating a safe, well maintained vehicle.
In my opinion this trumps all the other fundamental requirements. As an owner of a business it is good policy to ensure safe operations of vehicles. This means regular maintenance and inspections for lights, brakes and tires. Furthermore, DMV reports should be pulled every six months on all employees that operate vehicles. Driving infractions imperil the public. Overall good business sense dictates prudent behavior; prevention is the best risk control.
One final comment related to requirements. The Internal Revenue Service wants to know the policy of the company related to vehicle operations. They want to know the following:
– Is the vehicle taken home at night?
– Does the owner drive the vehicle?
– Are mileage logs kept?
There is no right or wrong answer, the answers merely indicate proper accounting procedures required for business purposes. Lessons 60 through 63 explain and illustrate the proper accounting procedures and compliance based on the answers given.
Furthermore, there should be, inside the company’s policy and procedures manual, a section addressing vehicle operations.
Most of the lower end accounting programs do not have the ability to assign a particular cost to a vehicle. A form of double recording of costs is necessary. The first entry is to the accounting software and a copy is made to a vehicle operations Excel workbook for a particular year. A section below covers this double entry system.
To properly account for vehicle operations the bookkeeper must first modify the chart of accounts to record entries to the correct ledgers. The type of business determines if vehicle operations are a function of cost of sales or a traditional general expense on the income statement. The key is determining if transportation is customarily required to sell the product or provide the service. The following are examples of common industries where transportation is required and therefore the costs are located in cost of sales:
* Hauling * Delivery Services
* Taxi Cabs * Towing
* Construction-Contractor * Residential Services
* Contractor Trades * Waste Pick-up
* Distribution * Landscaping
In other businesses, vehicle operations are not required but still exist to facilitate business. Examples include banks with pick-up services, professional firms that provide on-site services at client offices, technology practices installing or maintaining client servers and agents for brokers. In these cases, the transportation is not a part of the service or product provided; they augment the primary service. Therefore cost of vehicle operations are recorded to expenses.
What about the marginal businesses? Here are examples and the corresponding answer:
A) Florists – Post to cost of sales because the customer expects to have delivery of flowers.
B) Pizza Shops – Post to cost of sales, it is normal to expect delivery of pizza.
C) Medical Practices with Multiple Sites – Transportation costs are posted to expenses. It is expected for the doctor to stay in one place or have hospital rights. Transportation is not envisioned when thinking about his/her services.
D) Personal Trainers – Post to expenses. Even though transportation is often required it is not really a function of the primary service rendered
A parent account is created in either cost of sales or in expenses with several child accounts. The following is a list of the respective child accounts:
– Maintenance and Repairs (R&M)
– Taxes and Licenses
It is possible with lower end accounting software to set up the child accounts as control accounts and assign a unique identifier for each vehicle. This way a customized report can be generated limiting the costs to a single vehicle. QuickBooks is an example of a software whereby a unique identifier can be assigned to a vehicle (go to lists/other lists) and thus have the costs assigned to the particular vehicle.
With the above account structure, regular ongoing costs (fuel, R&M) and monthly costs are posted to the respective account. Notice that the debt service component of interest is not included? Nor Depreciation? These two costs are located in the capital costs section of expenses. Some businesses will include the costs with vehicle operations for interim reports and transfer the costs to capital costs for final year-end reports. When management uses these costs as a function of cost-plus contracts or for bidding purposes, it is a best practice reclassify these costs to vehicle operations accounts. Most small business owners lack a full understanding of the costs to operate a vehicle each month. Expect the dollar value to exceed $700 per month on a regular basis for a simple tuck or van. For larger light duty trucks/SUV’s/vans expect costs to approach $1,000 per month. The above accounting format will bare this out.
As the bills arrive, post the debit value to the most appropriate account and the credit to either accounts payable or cash. Often debit cards are used for fuel purchases, use the purchases journal to record these daily entries.
Earlier I mentioned a second recording of entries. A good bookkeeper creates an Excel workbook with a spreadsheet for each vehicle. In addition, a summation spreadsheet sums the respective vehicles into one amount which matches the same function as reported in the income statement.
Each vehicle spreadsheet should have a header section with the following information:
* Here are some examples to help facilitate a better understanding.
Unit Model – F150 Regular Cab 7′ Bed Lender – Eastern Bank
Unit License Plate – ECCO-01 Loan # – ZP44010789
VIN – VN01814G47104ABC Original Loan Amount – $23,700
Model Year -2014 Original Cost Basis -$31,614
Depreciation Schedule – T19 Driver – Jimbo Brown
Notice this section identifies all the critical information for the unit. Furthermore, links from each item are assigned to easily retrieve the source document.
The next section contains the mileage readings conducted monthly. For governmental compliance purposes, logs must be kept. Drivers should turn in logs weekly for review and recording. The spreadsheet records the monthly beginning and ending odometer readings as illustrated below.
Odometer Jan Feb Mar … Dec
Beginning 13,714 15,641 17,469 32,790
Ending 15,641 17,469 20,292 33,906
Miles/Month 1,927 1,828 2,823 1,116
Total Miles Year-To-Date: 20,192
The next section breaks out the income statement vehicle operations report in more detail. Notice the left column is broken out into ongoing and monthly charges.
Note ‘A’ – On March 7, 2016 Jimbo backed the truck into brick work on Project #111615 causing $318 of damage to the bumper and $942 of repair work to the house. Entire cost was paid by the company as insurance deductibles are a minimum $1,500. Link is to both bills from the accident.
The schedule divides costs into ongoing daily costs of fuel, maintenance (car wash, vacuuming, oil changes and filters), repairs, parking and tolls; and monthly recurring costs of insurance, interest on the debt, taxes, registration/tags and depreciation (non-cash value). There is included a line for one-time items such as deductibles, and incidentals. Both groups of costs combined match the book costs as reported on the income statement (profit and loss statement).
With debt service (the monthly loan payment) there are two components, interest and principal. The interest is included on the income statement and in the monthly recurring section above. The principal portion is a balance sheet debit to long-term liabilities. By including principal and subtracting the non-cash aspect of depreciation, the result is the actual cash costs to operate the vehicle that month.
At the bottom of the spreadsheet include two logs. One is the maintenance log for cleaning and regular oil/filter changes. The second log is for repairs and accidents. Always link each expense item to the PDF of the respective bill. This way management can easily review the detail for the respective vehicle expenses.
One last item for the respective spreadsheet, link the depreciation to the respective depreciation schedule associated with that particular asset.
The Excel workbook should include a master summation page for the cost of operations section. Each cost cell is linked to the same cost cell for each of the respective vehicles. This section should match the income statement reports in total for interim and annual reports.
For many small businesses the cost of vehicle operations is significant. A typical small truck/SUV/van costs around $9,000 per year to operate. Thus, a fleet of 7 vehicles ends up as a very big number at year-end. Management rarely considers how to account for costs or even how to track the costs. Usually, nobody is tasked with this responsibility. At the end of the day, it is the bookkeeper’s job.
I encourage small businesses to use fleet cards for fuel as the card requires mileage inputs prior to dispensing fuel. One card is assigned to a vehicle. If there is a spike in fuel consumption, it is a clear sign of the operator using too much gas, e.g. pumping gas into another vehicle.
Stay on top of the receipts and mileage logs.
Summary – Vehicle Operations
Proper tracking of vehicle operation costs requires double recording. One recording is to the traditional accounting software in a parent-child account structure. Name the parent account either ‘Transportation’ or ‘Vehicle Operations’. The child accounts include:
* Maintenance and Repairs
Depreciation and interest are a function of capital costs in the expenses section of the income statement (profit and loss statement). The second recording of vehicle operation costs is to an Excel workbook. There is a separate spreadsheet for each vehicle. The spreadsheet has four major sections as follows:
1) Header – Information about the vehicle
2) Mileage Logs – Mileage by month
3) Cost of Operations – A table of costs broken out by the child account structure found on the income statement and the cash adjustments for depreciation and principle.
4) Maintenance and Repair Logs
Each of the cost cells are linked to the respective receipts. There should be one section in the company’s policies and procedures manual addressing vehicle operations. The policies should comply with the Internal Revenue Regulations, insurance requirements and state vehicle laws and regulations. ACT ON KNOWLEDGE.
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