If you operate a car for business, you can deduct its cost on your tax return. The IRS offers two methods to calculate this deduction: the actual expense method and the standard mileage rate method.
Keep a Mileage Log
A mileage log is crucial for independent contractors and freelancers who need to track their car expenses. It allows them to write off a specific amount of their vehicle costs, which can help them save big on their taxes.
A good mileage log keeps records of all business trips, including the date, mileage, destination, and purpose of each one. It also helps them separate their business miles from their miles.
There are many types of mileage logs, including a paper book or booklet, a spreadsheet in Excel or PDF format, or an app that allows users to track their driving and deductible expenses from any device. Each of these options has its advantages and disadvantages.
However, the most important thing is to ensure that your mileage log meets IRS standards and does not violate any rules. This can save you from an audit and prevent losing a year’s deductions.
Using an app is an easy way to ensure you’re logging your mileage accurately. They let you track miles automatically, create compliant mileage logs and store your documentation safely. This can save you time and effort, making it easier for the IRS to validate your mileage log and tax deduction.
Don’t Overestimate Your Mileage
The IRS sets standard mileage reimbursement rates each year. This rate can benefit small business owners who operate vehicles for their businesses. However, it would help if you were sure not to overestimate your mileage.
If you do, car insurance rates will likely increase if you claim too many miles. Additionally, your insurer may deem you a higher risk and refuse to cover you.
According to a recent survey, 27 percent of drivers underestimate their annual mileage. This is a bad idea because it can cost you much money.
Keep a detailed mileage log to get the best car insurance deal. It can also help you calculate your tax deductions.
Keeping a record will help you avoid overestimating your miles and allow you to maximize your deductions with the Standard Mileage Rate.
The standard mileage rate method is very straightforward, and it is the preferred method for most drivers. You multiply your business miles by the standard mileage rate to get your deductions.
The other method is the actual expense method, which entails deducting all vehicle expenses, including gas, maintenance, repairs, and insurance. This is a more comprehensive way to calculate your mileage deduction, but it’s also more demanding and requires much work.
Keeping receipts is essential for your business, and they can also help you maximize your deductions with the standard mileage rate. Besides helping you file your tax return, receipts can also be helpful for budgeting or saving money for future purchases.
Whether you’re buying inventory for your business or raw materials to craft into things to sell, it’s essential to get a receipt when possible. A receipt shows proof of purchase and ownership and can be used to resolve customer issues (e.g., refunds and exchanges).
Keep a record of your travel expenses. Depending on your business, you can deduct some of your airfare, fuel, accommodations, and other travel-related costs.
In addition, if you receive funds from the government to cover disaster-related expenses, you’ll need receipts for those costs as well. This will help you track your spending and determine if you’re being treated fairly during an audit.
According to the IRS, keeping receipts for three years is a good rule of thumb. If you’re unsure how long to keep them, ask your accountant for a recommendation. They’ll know more about the tax laws than the average person, and they might be able to help you make better decisions regarding how much to keep and how long to keep it for.
Don’t Overpay for Gas
Taking advantage of the standard mileage rate can be a great way to maximize your deductions for gas. You can write off a certain amount for each mile you drive.
This is because the standard mileage rate includes fixed costs that don’t change how much you drive. If you go a lot, you might get a more significant tax break using the actual expenses method, but that depends on your situation.
One way to minimize overpaying for gas is to prepay it with a credit card at the gas station. You’ll usually get a receipt for the amount you paid, but some gas stations will place it on your card, so you may have to go back inside to get it.
You can also save money by choosing a natural gas company that doesn’t charge you daily fees as most big national brands do. This kind of plan is called a “market-based” plan, which means you pay based on the day’s market price for natural gas.