Claiming the Standard Mileage Rate

Claiming the Standard Mileage Rate

Claiming the standard mileage rate for an automobile on your taxes takes a little record keeping. Some taxpayers hope to avoid that hassle by claiming actual expenses, instead. Truth be told, even more record keeping is necessary with the actual expense method, and you must keep mileage records either way. These records will not be filed with your taxes, but must be available for review in the case of an audit.

If you use your vehicle for obtaining inventory or supplies for your business, you may deduct the business percentage of your automobile expenses. The first step is to record your mileage. Make a habit of writing down the odometer reading on January 1st each year. You may use a spreadsheet (like the PDF example shown here) or something as simple as a pocket calendar you keep in your glove box. Whatever the method, make sure to write it down. Record your starting mileage, ending mileage, where you went, and the purpose of your trip. Jot down your mileage on a scrap of paper if you have to. When you return home, you can fill in the remaining information on your spreadsheet. Total how many miles you drove for business only ─ round trip. The remaining miles used on your vehicle this year are either personal or commuting. Vehicles are considered listed property. Therefore, you must keep records denoting business use.

If your office is in your home, you will not have any commuting mileage. If, however, you work in an office on Main Street, instead of your home, the number of miles between your house, that location, and back again are your commuting miles. Write the number of business, personal, and commuting miles down in the appropriate blanks on Part IV of your Schedule C. You figure your total mileage for the year by subtracting your odometer reading on January 1st, from the odometer reading at the end of the year.

You may either claim the Standard Mileage Rate (SMR) or Actual Expenses, not both in the same year.

Standard Mileage Rate

Taking the standard mileage rate means you are able to deduct a certain amount for each business mile driven in a particular year (48.5 cents in 2007). You multiply the number of business miles driven by 48.5 cents per mile in order to figure your standard mileage deduction. This amount is figured in Part IV of your Schedule C, then deducted in Part II, line 9 of the same form. There are spaces to account for commuting and personal miles in Part IV, Schedule C, but those miles are not deductible.

You may also deduct the business percentage of parking fees and tolls, and the business percentage of state and local personal property taxes on the vehicle, in addition to the standard mileage rate. If you itemize your household deductions instead of taking the standard deduction, you may claim the remainder of your state and local personal property taxes on the vehicle on your Schedule A.

Example:
Dawn drove her car a total of 4530 miles this year. She drove her car 453 business miles this year. She multiplies that number by 48.5 cents (453 x 48.5 cents = $219.70). If she does not have any parking fees or personal property taxes to report on her car, she can simply carry the $219.70 to line 9 of her Schedule C.

If she does have parking and state and local personal property taxes on her car, Dawn will figure the business percentage she used her car by dividing the business miles by the total miles. (453 ÷ 4530 = 10%) Now, she will total her parking and state and local personal property taxes on her car, separately.

If she paid out a total of $150 in parking fees, she will figure 10% of that by multiplying 150 x 10%. Dawn will be able to deduct $15 in addition to the $219.70 for the standard mileage rate. She will then enter $234.70 on line 9, Schedule C.

If Dawn had a total of $200 in state and local personal property taxes for the vehicle, she will find her business percentage (200 x 10%). She may also deduct $20 on line 23 of her Schedule C.

If you want to use the standard mileage rate on a vehicle, you must choose it in the first year the automobile is available for use in your business. Then, in later years, you may choose to use either the standard mileage rate or actual expenses. If you switch from the SMR to actual expenses and want to deduct depreciation, however, you must use straight-line depreciation, as opposed to an accelerated method, estimating the remaining useful life of the car.

When the SMR is NOT allowed:
You may not deduct mileage on a car for hire (taxi).
You use five or more cars in your business at the same time.
You claimed an accelerated depreciation method in previous years on the same car.
You claimed a Section 179 deduction on the car.
You claimed actual expenses on a car you leased after 1997.
You are a rural mail carrier who received a qualified reimbursement
You claimed actual expenses on the same vehicle in the first year you used the automobile in your business.

Beware! When you sell the vehicle or switch to actual expenses for depreciation purposes, you will have reduce your basis by a certain amount (17 cents per mile deducted in years 2005 and 2006).

This and other information may be found in the book listed below.

Simon Elisha, author, Taxes for Online Sellers—

A How-To Guide for Individuals on Federal Tax for Internet Sales

ISBN: 978-0-9796328-0-8

http://www.taxesforonlinesellers.com/

Copyright 2007 -2008

Listed Property - What It Is

Listed property consists of items the IRS considers having the potential for personal use. Computers, vehicles, and cell phones all fall into this category. For these items, you must keep detailed records of personal versus business use.

Just keep a notebook next to the computer, for instance. Whenever the item is in use, jot down when and for how long, and whether it was business or personal use. This may sound tedious, but during an audit, you will have to produce these records.

It is the very same concept as keeping mileage journals for your vehicle. In fact, because automobiles fall under listed property, it is why you have to keep mileage records.

If in doubt whether something is considered listed property, keep records. If you question whether or not the IRS thinks you could be abusing the tax deduction, they probably do, too. More explanation of which items are considered listed property is given in IRS Publication 946.

Note: In order to use an accelerated method of depreciation for listed property, you must use the item more than 50% for business purposes. If you use it 50% or less in the business, listed property must be depreciated using the Alternative Depreciation System (ADS).

This and other information may be found in the book listed below.
Permission to use or excerpt with proper attribution.
Simon Elisha, author, Taxes for Online Sellers—
A How-To Guide for Individuals on Federal Tax for Internet Sales
ISBN: 978-0-9796328-0-8
http://www.taxesforonlinesellers.com

Finding Business Percentage When Expensing or Depreciating Items on Taxes

Deducting expenses on your taxes is straight-forward in many circumstances. For instance, if you pay advertising costs for your business, simply total the receipts and list the figure under advertising on your Schedule C. If, however, you are depreciating or expensing an item, which you don’t use 100% for business purposes, you will need to find your business percentage.

Business Percentage: Business Time used divided by Total Time used equals Business Percentage. Your answer will be a decimal number. Multiply that decimal by 100 to find your business percent. Total Amount Paid times Business Percent equals the amount you may deduct.

Let’s look at an example:

Kathy wants to claim actual expenses on her vehicle this year. She keeps track of her mileage. She notes she has driven her car a total of 20,000 miles this past year. Of that 20,000, only 2000 of the miles were for business purposes.

Kathy divides the 2000 business miles by the 20,000 total miles.

2000/20,000 = 0.1
0.1 x 100 = 10

Kathy used her vehicle 10% for business purposes this year. She may now deduct 10% of the total, actual costs for her vehicle.

Her receipt totals are:

Gasoline = $4000
Tires = $200
Repairs = $650
Insurance = $250
Registration = $76
Interest = $150

Total = $5326

Kathy may multiply her total expense ($5326) by 10% to arrive at the amount she may deduct in actual expenses for her vehicle ($532.60) on line 9 of her Schedule C.

Finding your business percentage works the same general way whenever you are figuring how much you may deduct for any item or service not used exclusively in business.

Permission to use or excerpt with proper attribution.
Simon Elisha, author, Taxes for Online Sellers—

A How-To Guide for Individuals on Federal Tax for Internet Sales

ISBN: 978-0-9796328-0-8

http://www.taxesforonlinesellers.com/

Ten Ways for Online Sellers to Keep Records

Ten Ways for Online Sellers to Keep Records

1. Keep receipts—If your receipt doesn’t show all the necessary information, you may write it on the back. You need to show: the cost of each item, the date purchased, who sold you the item (store name), and how you will use the item in your business (i.e. inventory). If you have purchased equipment for the business, also jot down when you began using the item for business purposes. Keep all receipts—even ones you may not think are relevant off the top of your head. When figuring taxes, they may become useful.

2. Record your mileage—If you use your vehicle to drive to the post office or to scout for inventory, you are allowed certain deductions. Whether you take the standard mileage rate or a percentage of your actual gasoline and maintenance on the car, you will have to know how many miles your vehicle was driven. You will also need to know how many of those miles were for business purposes. Track your mileage by jotting down the odometer reading, where you are going, and for what purpose every time you get in the car.

3. Print out online statements—Periodically print out online statements. These include everything from internet postage statements to income statements from online selling venues. This information will come in handy while filling out tax forms—not to mention in the case of an audit. You never know how long these online statements will be available on the web, so print new information frequently.

4. Make spreadsheets your new friends— Spreadsheets can be invaluable. Whether you keep them on your computer screen with predefined categories, or print out blank ones to fill in along the way, spreadsheets are a great way to organize information. Use them to track how many miles you drove and when. Use a spreadsheet to tally expenses with separate columns for where, when, why, what, and how much you spent.

5. Use an accordion-style folder filing system—Where do you stuff all of those receipts and print-outs? Drawers and shoeboxes don’t cut it. Invest in an accordion-style folder. You can make your own tabs fitting the categories you use: inventory expenses, supplies, mileage records, etc. This will make sifting through it all much easier come tax time. Start a new file each year.

6. Invest in accounting software—Many of the accounting computer software programs on the market today assist in not only helping you keep track of expenses and income, but they also integrate with tax software to help you prepare tax returns based on the information you have fed into it each year. Some software programs even assist with keeping track of your inventory.

7. Keep credit card statements—Credit card statements may be used to help when figuring your taxes. You may use them as receipts for business purchases as long as they show the necessary information. You may also deduct the business percentage of any interest you pay to credit card companies.

8. Keep bank statements—Bank statements help jog your memory about what you purchased and when. They may be used as receipts as long as they show the necessary information. Are you charged service fees on your business banking account? Bank statements show those fees—which are deductible.

9. Keep previous tax returns—Keep previous tax returns much long than you ever thought necessary. Just because you no longer have a copy of it, doesn’t mean you can’t still be audited on it. For serious issues, the IRS can audit you for up to six years. If they feel something is outright fraud, there is no time limit. If you expensed an asset, then later sell that asset, you may have to pay recapture taxes for up to five years. You need to have these records to properly record that information.

10. Account for your inventory—Use your new friend, the spreadsheet, to keep track of your inventory. Write everything down as you buy it. Record what you purchased, where, the date, etc. When that item sells, go back to your spreadsheet to mark it as sold. Note the selling price. This will make your life unbelievably more organized.

Permission to use or excerpt with proper attribution.
Simon Elisha, author, Taxes for Online Sellers—

A How-To Guide for Individuals on Federal Tax for Internet Sales

ISBN: 978-0-9796328-0-8

www.taxesforonlinesellers.com