If you're an entrepreneur or a freelancer, chances are you already realize how every small expense can add up over the course of a year. Though seemingly insignificant on their own, each stamp and every ream of office paper is an expense that comes out of your bottom line. What you might not know is that many of these expenses can be written off of your tax bill. This is especially important when it comes to transportation expenses. With gas prices hovering near $3 and $4 per gallon, those work-related trips and errands can take a huge bite out of your income. However, reporting your transportation expenses to the IRS can lower your tax bill. Here's a quick and easy guide that will help you write off transportation expenses as you prepare for tax day.
Who Can Write Off Transportation Expenses?
Typically, deductions for transportation expenses are claimed by people who own their own business or work from their homes. For example, if you are a freelance computer programmer and you travel to meet a client, you can deduct the cost of your round-trip transportation for those meetings. Keep in mind that your commute from home to your place of work is not tax deductible and transportation expenses incurred while traveling away from home overnight is covered by another section of the U.S tax code. You have two options for claiming your car and truck expenses. You can use the standard mileage rate to calculate your business miles or you can submit your actual expenses. Here's a brief overview of these two options.
Using The Standard Mileage Rate
The standard mileage rate as set by the IRS allows you to calculate your business miles for the year and deduct them as one lump sum. In addition to covering gas and other related expenses, this lump sum should theoretically also cover the cost of maintaining your vehicle for your business. You are also allowed to deduct parking fees and tolls on top of your mileage.
How To Keep Track Of Your Business Miles
You will need to keep records of your business travel. Bankrate.com suggests that drivers keep a pocket calendar or day book with the following information:
- Business purpose
- Total miles
- Parking fees
Using Actual Expenses
The other method to use when deducting your business travel expenses is by keeping track of your actual car or truck expenses. According to the Internal Revenue Service, these expenses include:
- Lease payments
- Garage rental
- Parking fees
If your vehicle is used for both personal and business purposes, you must divide your expenses accordingly. For example, if 16,000 out of the 20,000 miles you put on your car last year were business miles and 4,000 were personal miles, you can only deduct 80 percent of your expenses.
How To Keep Track Of Your Actual Expenses
Bankrate.com suggests keeping track of your expenses as you spend rather than trying to recall all of your expenses over the course of a year during tax time. Put all your receipts in a common area. You can use something as simple as a shoebox or as sophisticated as scanning them onto a computer program. In the beginning of the new year, you should start sorting through these receipts and inputting the information into a spreadsheet.
Which Method Should You Choose?
It's a good idea to crunch the numbers both ways to see which will give you the largest tax benefit. This is especially true if this is your first time claiming this expense or if you have recently purchased a new vehicle. TurboTax advises that, "Generally, the more economical the vehicle is to operate, the more likely it is that the standard mileage rate will give you the bigger deduction. Conversely, the higher the operating costs, such as gas, repairs, tires, etc., the more beneficial the actual cost method is likely to be."
Other Important Considerations
If you're using the tax write-off as an excuse to buy a new Lexus, keep in mind that $11,060 is the maximum depreciation write-off for a new car that costs more than $15,300, assuming that it is used 100 percent for business purposes. This limit is higher for SUVs. It is also important to note that when you opt for the actual expenses method, you are locked into that method for future years. However, if you take the standard mileage rate deduction, you can switch to actual expenses method at a later time. Whatever option you choose, be sure to keep careful records of your business expenses over the course of the year. This will come in handy in the event that you are audited. It will also allow you to confidently claim this deduction.