The mileage deduction can be relatively straight forward but there are always interesting wrinkles that pop up. I'm often asked about the eligibility of taking a mileage deduction after reimbursement. Let's dive into what's allowed and what you should watch out for.
Let's say you're an independent contractor and you bill your clients 50 cents per mile on an expense sheet. Can you claim a mileage deduction on your annual income tax return?
If you also charged clients for travel expenses and were fully reimbursed, you can't take a tax deduction for fully-reimbursed expenses. The 50 cents per mile clients pay can be deducted by your clients. However, that doesn't fully reimburse you for your driving costs, so you may deduct the amount your driving costs exceed 50 cents per mile. You can do this in two ways.
You can use the standard mileage rate to calculate your mileage deduction, which is 54 cents per mile in 2016. If you do this, you can deduct 4 cents for every business mile in 2016.
Alternatively, you may use the actual expense method. This allows you to deduct what you actually spent on your car. It requires you to keep track of all your car expenses such as gas and repairs. You add all these expenses together and then reduce them by the amount of non-business driving.
For example, if you drove your car 50 percent of the time for business, you would reduce your actual expenses by 50 percent. You may deduct the amount that this sum exceeds your total reimbursements for the year.
If you use the actual expense method, you must be able to prove to the IRS the total amount of your expenses and reimbursements for the entire year. If you use the standard mileage rate, you do not have to prove that amount but you do need to keep mileage logs that will pass IRS scrutiny.
If you want to assess the self-employed mileage deduction correctly, it’s crucial that you clearly understand the types of independent contractor mileage reimbursement options that count as business travel and are therefore eligible.
Even though there’s no limit to how many miles can be deducted as part of reimbursed expenses for self-employed drivers, there are instances when you might not be eligible for it, even if it was related to your work.
For instance, if you are traveling between two different places of work, then the self-employed mileage deduction can apply, and you can claim it. But if you are commuting to your place of work from your home, then the independent contractor mileage deduction does not apply.
Another example of where the self-employed mileage deduction can be applied is meeting clients or visiting customers. These types of trips can be claimed as part of the current mileage reimbursement rate for independent contractors as long as the visits have a business purpose.
Finally, if you are running various business-related errands or tasks that require driving, that can also fall under the mileage tax deduction rules. However, if those errands are for bringing tools or for driving a car with advertisements on it, then they are not considered business trips and thus cannot be claimed for a deduction.
Even though there are many potential instances where you might be able to claim a deduction, that could backfire and cause a lot of issues with the IRS if you were audited and didn’t have a way to prove the mileage through proper documentation.
Because of that, if you want to take advantage of tracking your business miles and getting them deducted, you need to have a reliable and convenient process for ensuring that you are compliant and know exactly how many miles you need to claim.
First, you need to figure out whether you want to do standard tracking for your self-employed mileage deduction or a more comprehensive one that tracks vehicle depreciation, gas, lease payments, and anything else related to driving in addition to the miles traveled. One thing to consider is that when you track more expenses, the process can become more complicated and more difficult to claim.
Another critical aspect of figuring out how to claim your self-employed mileage deduction is the actual process of keeping track. Many still use pen and paper, but this is an unreliable and hard-to-track method if there is an audit.
Thanks to modern technology, more and more self-employed people are opting for new app solutions like MileIQ that automatically log all trips and allow users to then categorize them by purpose and eligibility. This saves a lot of time and ensures that even if you forget to log a trip, it will be recorded and you can add information about it later.