Disclaimer: This Q&A is for general information only. It should not be construed as specific advice for your personal situation as exceptions can exist for any given rule. Consulting with a tax professional is always recommended.
Q: I drive a personal vehicle for business purposes. Do I need to track my mileage and how?
A: A mileage log should always be maintained no matter what method you use to deduct auto-related expenses.
You can use a mileage app on your smartphone or keep a manual log on paper or on a spreadsheet. The following elements are required entries in a mileage log:
- Date of trip
- Miles driven (or beginning and ending odometer readings)
- The address or general location of your destination
- The purpose of the trip – VERY IMPORTANT
Q: I am a sole proprietor/single-member LLC. What are my deduction options for auto expenses and where do I report it when I file my taxes?
A: If you are a sole-proprietor or single-member LLC, you will, by default, file a Schedule C with your personal return.
You may deduct either mileage or actual expenses on a Schedule C, but not both. Regardless of the method chosen, total miles driven for the year, commuting miles, and business miles must be reported.
The mileage deduction method takes business mileage only and multiplies it by the current mileage rate published by the IRS.
The actual expenses method involves a three-step process. First, business mileage is divided by total miles driven for the year to determine what percentage of the time you are driving your vehicle for business reasons. Second, actual expenses are totaled. This includes, but is not limited to, gas, repairs, maintenance, tires, insurance, registration, and depreciation. Last, the percentage calculated in the first step is multiplied by the amount from the second step. The result is the amount you can deduct.
Most taxpayers opt for the mileage deduction. There's far less recordkeeping and calculations involved and it usually yields a higher deduction than the actual expenses method, but not always. Tax preparation software is geared to receive data for both methods, calculate both options, and indicate which one gives you the higher deduction. Although you may switch methods from year to year, special rules do apply. Please consult with a tax professional if you are considering changing methods from the prior year.
Q: I am a member of a partnership/multi-member LLC. What are my deduction options for personal auto expenses and where do I report it?
A: In this situation, the business, by default, will file a partnership tax return and you will report your share of the partnership's earnings on line 17 of your personal return.
Partnership returns do not accommodate the mileage deduction.
You may get reimbursed for your mileage by the partnership. This would also require you to maintain a mileage log so the partnership has documentation to support the nature and amount of the reimbursement. This is not considered income to you. The partnership, however, can deduct it as an auto expense. If this method is used, it is highly recommended that this reimbursement arrangement is clearly documented in the operating agreement and occurs on a regular and consistent basis, such as weekly or monthly. You do have the option of getting reimbursed for actual expenses, but remember that if you don't drive your personal vehicle 100% of the time for business, only a partial reimbursement should be issued. That may be difficult to calculate.
The other option is to calculate either the mileage or actual expense deduction and report it as an unreimbursed partner expense (UPE) on Schedule E of your personal return. This will reduce your share of the partnership earnings reported on line 17 of your personal return. Please consult with a tax professional for further guidance on this option. You will need to maintain a mileage log for this strategy as well.
Q: I have elected to be treated as an S Corporation for tax purposes or I'm a member of a business that files an S Corporation tax return. What are my deduction options for personal auto expenses and where do I report it?
A: The business will file an S Corporation tax return and you will report your share of the earnings on line 17 of your personal return. S Corporation returns do not accommodate the mileage deduction.
Similar to a partnership, you may get reimbursed for your mileage by the business. Please refer to the previous answer for guidance.
The other option is to report your deduction as an unreimbursed employee expense, but you must be on the payroll to do this. If you are not an employee and don't receive a regular paycheck, this option is not available. This deduction is reported on Schedule A, line 21 and is subject to the 2% AGI limitation. Again, you will need to maintain a mileage log to support this deduction.
Q: You mentioned commuting mileage. What is that?
A: If you are not a home-based business, the drive to and from your home and business location is considered commuting mileage and is not deductible.
Q: What about company vehicles?
A: If a vehicle is titled in the business' name, all expenses related to operating that vehicle should be paid out of the business bank account and are deductible on the business tax return. Deducting mileage is not an option. Ensure that all company vehicles are driven for business purposes only.
Q: I have an auto loan and make monthly payments. Are the payments deductible?
A: Only the part of the payment that is interest. The principal portion is not considered an expense.
Q: I lease a vehicle and make monthly payments. Are the payments deductible?
A: Yes, as long as you have no intention of buying the vehicle at the end of the lease term. When adding up actual expenses for the year, you would include lease payments in that total. If there is a reasonable chance that you will purchase the vehicle at the end of the lease term, however, consult with a tax professional to ensure you're calculating your deduction in compliance with IRS rules.