Why should business owners bother tracking their mileage?
Tax Deductions: The main reason is that it can reduce your taxes. By tracking your mileage, you can deduct either the cost of a portion of your vehicle expenses from your taxes.
Cost Control: Knowing how much your business vehicle is costing you is crucial. It's not just about fuel; it's about maintenance, repairs, insurance, and depreciation. Tracking mileage lets you keep a tight leash on these expenses.
Reimbursement: If your employees use their cars for business, mileage tracking ensures fair reimbursement.
Compliance: The IRS requires accurate mileage records to support tax deductions. It's your proof if you ever in an audit.
Budgeting and Planning: Want to make wise decisions about your business's transportation costs? Mileage tracking gives you the data you need to make informed choices.
Employee Accountability: When employees know their mileage is being tracked, they're more likely to use company resources responsibly. It's a win-win for everyone.
What to Track?
Now that we've covered the "why," let's talk about the "what." What exactly should you be tracking?
Set a reminder to check your odometer (mileage tracker in your car) at the beginning of the year and again at the end of the year. Reason being is that you will want to know the total miles driven for the year.
Next is recording your business trips:
Date: Always record the date of your trip.
Destination: You want to record the 'from' and 'to' address.
Miles: The number of miles between the above addresses - don't forget to double if round trip!
Purpose: Why did you make the trip? Business meeting? Client visit? Make a note!
How to Track Mileage:
Alright, you're convinced; mileage tracking is the way to go. But how do you actually do it? Fear not; it's not as challenging as it sounds:
Manual: You can use a notebook or spreadsheet to track your trips. You just need to make sure you get into the habit of entering your trip when it happens, otherwise it's a lot harder to remember what trips you took 3-months ago.
Software: There are tons of mileage tracking apps and software available. Many of them use GPS to automatically record your trips. It's like having a personal mileage secretary!
Our recommended app is MileIQ. (we do not have an affiliation or being paid to recommend, just simply like the app)
It automatically tracks your trips (make sure location is turned on) and you either swipe left to confirm it's a personal trip or swipe right for business. Once the trips are classified, you can create reports for either tax deductions or mileage reimbursements.
How is mileage deducted for the business owner?
There are two ways that mileage can be deducted.
1) Mileage Rate
For every mile you drive for business purposes you can deduct the standard mileage rate for the year. The mileage rate is a flat rate that considers fuel, insurance, vehicle registration, and maintenance which means you cannot deduct these as well.
This rate changes every year so check to make sure you have the latest rate.
For 2024, the Standard Mileage Rate is 0.67 per mile.
For example, if you drive 100 miles in the year relating to business purposes: 100 x 0.67 = $67. This is how much you can deduct from your taxable income.
Note that miles driven from your home to the office and back again is not eliigble for mileage as it's considered commuting.
2) Actual Expense Method
This method allows you to deduct a portion of actual expenses of your vehicle but you still need to track how much mileage you drove for business purposes. It does require a lot more paperwork but can result in a higher deduction than the Mileage Rate.
Costs you can deduct:-
Fuel and oil
Car Insurance
Lease payments
Interest on car loans
Repairs and Maintenance
License and Registration fees
Tires
To calculate your tax deduction based on Actual Expense you first need to determine how many miles you drove for business as a percentage.
To calculate: business miles divided by total miles driven
For example, if you drove 3,000 miles for business and 10,000 for the year the calculation would be: (3,000 / 10,000) multiply by 100 which gives 30%.
You then are able to deduct 30% of all car expenses for your tax deduction.
You must pick one method. You cannot use the mileage rate method and deduct expenses for fuel.
Reimbursing Employees
If you have employees that drive for business purposes, they can submit using the Mileage rate method for reimbursement. They are not eligible to deduct as per the Actual Expense method i.e. they wouldn't be reimbursed for any fuel costs.
It might not be the most riveting topic, but it's a crucial tool for saving money, staying compliant, and making smart decisions.
DISCLAIMER
The Finance Agency are accounting professionals however, any information contained or given is for educational purposes only and does not a substitute for financial advice from a professional who is aware of the facts and circumstances of your situation. Please consult with a CPA, tax preparer, or accountant that is working with your specific business situation and State regulations.