The Internal Revenue Service frequently audits deductions for auto expenses, and the documentation requirements are fairly complex. This should not discourage you from taking all the deductions to which you are entitled, however, since we have had great success at defending auto expense deductions in IRS audits. What is important is to keep the necessary records — then you have nothing to fear.
The proof of your auto expense is straightforward. You need to document:
- Car ownershipRegistration and/or purchase contract
- Your total miles drivenRepair bills from the beginning and end of year showing odometer readings, and
- Your business miles drivenContemporaneous records listing business appointments, etc., and the mileage incurred.
The above items are sufficient to claim the “standard mileage” deduction which is set at regular intervals by the IRS (57.5 cents per mile for 2015 and 24 cents as of 1/1/2016). If you elect to us the “actual expense” method, you must also document:
- The cost of your vehicle or value when you placed it in business useTo calculate the depreciation deduction allowed by the IRS
- Gas, oil, repairs, registration, insurance, payments, and any other vehicle expensesThe actual expense method is appropriate for a relatively expensive vehicle that is not driven a lot of miles during the year. The standard mileage method is more appropriate when an inexpensive car is driven a lot. If you want to elect the standard mileage method in any year you use your car, you must use it in the first year. Then you can use either method in the subsequent years.
There’s a simple way to maintain all the necessary documentation:
- Have your car serviced in December or January of each year to prove odometer readings.
- Write all your appointments in your calendar, even business shopping trips, trips to workshops and classes — all driving that is business related.Record the addresses of the place you go.
- Periodically look up all the addresses on Yahoo.maps or Mapquest and record the mileage in your calendar.We suggest doing this once a month.
- Use the same credit or debit card for all your automobile-related expenses.Add up the totals from your monthly statements (and then save them for 3 years). Do not pay cash for gas because you might miss the deduction.
Note: Business driving is defined as mileage between business locations. Unless you have a home office, driving to the first place of work is not deductible. If you are not self-employed have your employer require you to maintain an office-in-home as a condition of employment, and get a letter proving the requirement. Then on days when you legitimately work at home before or after going to the office or to a client, you can deduct the mileage from/to your home.
Lease or Buy
This is a complicated decision and depends on many of your personal factors — income bracket, miles driven per year, percentage of business use, frequency of getting a new vehicle, cost of the vehicle, etc. You may find the following link helpful in making your decision: http://www.leaseguide.com/lease03.htm.