Tax season comes just once a year, but it takes significant organization each month to prepare. For self-employed individuals, in particular, the process of gathering documentation and maintaining accurate reports is especially important. If you plan to take the mileage deduction, home office deduction, or other eligible tax write-off, you’ll need substantial proof to back your claims.
In this guide, we will focus our attention to the mileage deduction, explaining the step-by-step process of claiming mileage on taxes.
When it comes to claiming car-related expenses, the IRS gives taxpayers two options for calculating potential tax savings: the standard mileage rate or actual expense method.
It’s fair to mention this is one of the most important steps in claiming mileage from the IRS. Not only do accurate records keep your tax information well-organized, it also helps you avoid any IRS audits down the road.
With the standard mileage rate, it’s imperative to maintain a logbook of all your business drives. One of the easiest ways of doing this is by signing up for an automatic mileage tracking app. Every time you drive to a job site or run a business errand, the app will run in the background of your phone and create accurate logs of your mileage.
Alternatively, in the chance it is more beneficial to deduct actual expenses, you’ll need to keep receipts, digital invoices, and any documentation that backs your deduction claims. To illustrate, if you have a repair done on your vehicle, you must keep the receipt for your future tax filing.
Although there are pros and cons to each calculation method, it typically depends on your annual income to understand which option is best. In general, the standard mileage rate may produce larger savings one year, while the actual expense method could offer a larger deduction the next. For these reasons, our tax experts often recommend that self-employed individuals and business owners roughly calculate and compare both methods before proceeding forward.
Important tip: Business owners must use the standard mileage rate in the first year of using their vehicle for business purposes in order to alternate between methods in the years following.
How to calculate:
Now that you have the basics figured out, it’s time to file! For those who are new to filing taxes on a Schedule C form, we recommend seeking assistance from a licensed tax professional. This person will walk you through the process of filing as a self-employed individual and help you avoid any tax mistakes that could put a damper on your deduction.
If you use a tax preparation software instead, you will need to add your vehicle-related costs to the Schedule C, Part II, Line 9 section yourself. It goes without saying you must reference your records to accurately fill out the requested information.
The good news is — the hard part is over! You officially filed as a self-employed taxpayer. However, don’t be quick to throw away those important documents. The IRS has up to three years to request an audit. That means, you will need to hold on to all your tax paperwork for a minimum of three years or more.
We hope you enjoyed our guide to claiming mileage from the IRS! Whether you have help from a tax professional or take on the job yourself, it’s important to know what to expect throughout the entire process. Since vehicle expenses account for the majority of eligible write-offs, we encourage all real estate agents, contractors, HVAC technicians, sales professionals and other business owners to start logging mileage today!
Visit the MileIQ website to learn more about automatic mileage tracking and the different plans available.