Bad habits practiced too long become so deeply rooted that dislodging or altering them can be extremely difficult.
And when bad financial habits impact your bottom line, and money is being pointlessly squandered, it’s time for the wise entrepreneur to take a good look at these practices.
Nowhere are bad financial practices more apparent than in the business use of a personal vehicle. And using sloppy practices here can affect your bottom line.
Mileage logs work
The overarching rule for business use of a personal vehicle is that a contemporaneous log is necessary. Failure to keep an accurate log will result in missed deductible mileage expenses, but more importantly, your tax claim for vehicle use may be disallowed.
Maintaining a proper log simply requires recording the odometer reading before and after driving for business. Document the date, place, and business nature of each trip along with the number of miles.
Each log entry should document one uninterrupted trip. If you make several business stops on one trip, you don’t need to list the number of miles between locations. You can even count a trip as a business use when it includes minimal personal use.
And note that if you use multiple personal cars for business, you should have a mileage log for each vehicle.
When you’re figuring out the auto expense tax deduction, take your log and multiply the business miles by the standard mileage rate.
No need for tracking fuel and maintenance costs throughout the year; the mileage rate takes those into consideration along with wear on the vehicle.
Even if you do track actual operating costs for the car, not all of them can be deducted as a business expense. You still need to know the number of business miles compared to the total miles, and only claim the percentage of business use as a business expense.
And, as you’ll see, tracing all fuel and maintenance costs is more burdensome than having a mileage log.
Make it accountable
The mileage log ensures that you don’t play guessing games at year-end. Guessing at the number of business miles is a sloppy way to claim business expenses; and interestingly, guessing typically leads to underestimating your business mileage.
If you have employees, or your business is incorporated, a mileage log ensures the company is reimbursing auto expenses according to a plan. But even if you are the only employee of a corporation you own, the accountable plan rules apply.
Without an accountable plan, a corporation is required to report vehicle reimbursements as taxable compensation.
If you are a solo employee of your own corporation, without an accountable plan for auto expenses, your business incurs payroll taxes, and the reimbursements are no longer tax-free to the recipient employee-you. You’re stuck owing tax instead of getting a tax-deductible expense.
Do yourself a favor: Keep a log in your personal vehicle for business miles driven. You’ll stop guessing, get the right expense amount, and have no worries about tax authorities questioning your deduction.