For business owners and self-employed individuals, there are a lot of bits and pieces to keep track of for tax purposes. Between travel, home office expenses, and internet and phone bills, it becomes rather time-consuming to manage all your business costs at once. On top of that, filing taxes can often feel like running a marathon. With so many expenses to itemize, how do you steer clear of making a tax mistake?
One of the simplest ways to avoid the stress and chaos during tax season is to have all your documentation ready and in order. We know — easier said than done! But the truth is, the IRS doesn’t give much leeway when it comes to tax deductions. In general, you’ll need accurate records of everything to be able to back up any claims you take.
Luckily, with car expenses you never have to worry. MileIQ has got your back. There is no reason to roughly calculate your mileage deduction these days. Just download a mileage tracking app onto your smartphone and let the technology do its work. With a solution in hand, here are the top three reasons why inaccurate reporting will only cost you.
Those eligible for a mileage deduction and other car-related expenses have a huge opportunity to earn savings on your tax return. However, if you’re not in tune with tax laws nor understand IRS rules and regulations, you could easily put yourself at risk of suspicion when filing your taxes.
Are you planning to estimate your mileage deduction? Here are the top reasons why you should avoid this common tax mistake:
It’s not unusual for taxpayers to assume they’re in the clear once they submit their federal and state tax return. As a matter of fact, most people think if they file on time and get approved that they’re free from investigation. However, the chance of getting audited is always a possibility. Normally, the IRS will reach out to you as soon as possible, but they have up to three years after you file to make a request.
So, what happens if you only have an “estimate” of your mileage deduction?
First the IRS examiner will ask to see your records. If you lack such records, you’ll be forced to prove your business miles through oral testimony or perhaps any documentation you can provide. Assuming you don’t have any consistent receipts or records of your car expenses, the IRS will see this as an immediate red flag.
Let us put it to you this way — it’s just not worth the risk. If the IRS finds errors on your tax return and you don’t have the documentation to back it up, you could potentially be looking at multiple penalties and fines. In worse cases, you could even be sentenced to jail time. Of course, this typically involves other dishonorable offenses beyond your estimated mileage deduction. But in any case, false reporting tarnishes your reputation with the IRS. As a business owner, this spells bad news as well. Remember, the IRS has the ability to seize your business assets and close down operations if necessary.
It doesn’t matter the size or type of business you run, it’s crucial to keep your books in order throughout the tax year. When you let costs slide, such as mileage tracking or meal expenses, it only harms the financial health of your business. Inaccurate reporting also gives you a misrepresentation of your taxable income and other important factors that determine employee benefits. By estimating mileage, you’ll never have a real indication of how much you use vehicles for business purposes.
If you qualify for the mileage deduction, it’s important to track business miles with a contemporaneous log. This requires you to maintain daily records of every business trip you take. For all your business-related drives, the IRS typically wants to see:
In the event that you drive your vehicle for both business and personal reasons, you’ll need to separate your time. Since the IRS only allows you to deduct business, charity, and medical drives, you’ll need to distinguish what percentage of the time you drive your vehicle for business.A good rule of thumb is to keep track of personal miles along with your business miles. With MileIQ, you can easily classify each drive as “Business” or “Personal” to help keep records precise.