For the typical Sole Proprietor, taking a deduction for business use of your vehicle is one of the best ways to legitimately reduce your taxable income and pay less tax. This article will walk you through the process of reporting vehicle mileage on Schedule C, the main form for reporting your small business income and expenses.
The IRS has authorized two methods of reporting vehicle-related expenses. Method #1 is known as the “Actual Expense Method”, in which you keep track of all vehicle expenses such as gasoline, oil, maintenance, repairs, car washes, insurance, depreciation and so on. Method #2 is known as the “Mileage Method” and it is this method that is the focus of this article.
Instead of tracking and reporting actual expenses, the Mileage Method only requires you to track mileage. You simply keep a log of your vehicle business use and at the end of the year you add up all those miles and multiply that mileage number by a rate established by the IRS. In 2009, that mileage rate is 55 cents per mile. If you drove your car 10,000 miles for business purposes, you simply multiply 10,000 miles by .55 to arrive at your vehicle deduction of $5,500. Then you report that $5,500 deduction on Schedule C, Line 9.
There are three main advantages to the Mileage Method:
1. It’s generally easier and less time consuming than tracking actual expenses. Think about it. With the Actual Expense method, you have to keep track of every receipt for every expense associated with your vehicle: every gas purchase, every repair or routine maintenance work such as oil changes and tune-ups, every car wash. With the Mileage Method, all you have to do is keep track of the mileage, which is easily done with a simple mileage log that you keep in your glove compartment. Every time you use the car for business, you record the date, the business purpose of the trip, and the mileage amount.
2. The Mileage Method may result in a larger deduction than the Actual Expense Method. Of course, the only way to know this for sure is to keep track of actual expenses as well as mileage. Then, at the end of the year, run the numbers both ways and see which method gives you the higher deduction. But for many folks, the difference is so insignificant that the time-saving benefit of the Mileage Method is well worth it.
3. If you use your vehicle less than 100% for business, the Actual Expense Method requires that you keep track of the mileage as well as all the receipts. Most Sole Proprietors use the same vehicle for both personal and business use. So if you are using the Actual Expense Method, after you add up all those expenses, you have to know the “Business Use Percentage” to arrive at the deductible portion of your actual expenses. You calculate the Business Use Percentage by dividing business miles by total miles. Example: you have 10,000 total miles and 8,000 business miles, resulting in a Business Use Percentage of 80%. If you have $5,000 of actual expenses, you don’t get to deduct the entire $5,000. Instead, your deduction would be $5,000 x 80% = $4,000. But the only way you can determine that Business Use Percentage is to track total miles and business miles.