Log Business Mileage to Save Money and Hassle

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.

Depreciation: Get a Grip on Your Own Tax Universe

Tackling the issue of tax depreciation is all about taking a new perspective on some outlays. Certain large business expenses need to be treated completely differently in the tax depreciation universe. Unlike ordinary expenses such as rent and advertising, the cost of fixed assets like buildings, computers, equipment, and furniture is deducted over time, not when you acquire the assets. And this is depreciation.

Small purchases don’t require depreciation; however, defining what qualifies as small depends on your business size, accounting practices, and depreciation policy. Generally, small businesses depreciate anything that costs at least $500 and will last more than one year. Accelerated depreciation uses higher depreciation in the initial years, while straight-line depreciation uses the same percentage each year.

Depreciable asset purchases are not considered expenses on the income statement. Instead, asset costs appear on the balance sheet. Depreciation is the expense category where cost is transferred over time from the balance sheet to the income statement. As depreciation expense is added to the income statement, the same amount is subtracted from assets on the balance sheet. This causes a negative number in the asset account, called accumulated depreciation. Original costs for assets stay in a separate account.

In principle, an asset’s cost is depreciated over its useful life. In reality, depreciation periods normally correspond with whatever is allowed under tax rules for various asset types. Sorting out details is your accountant’s job. However, it’s your job to be familiar with the process of recording assets and depreciating costs in your own tax depreciation universe.