You have opened your business and realize that you will need a car in order to travel, see clients, go to meetings, etc. Can you deduct your car as a business expense? Yes, provided that you use it for business and follow some IRS rules.
So, what does business use of a car mean? Business use of a car is when a car is driven for business purposes. First, understand that even though you are the owner of the business and the business has a location, driving from your home to the business and from the business back to your home is not deductible. This is called commuting and commuting is not deductible by an owner, nor any of the owner’s employees.
However, any other driving that you perform during the day going from place to place is deductible provided you keep a detailed record. What the IRS recommends (and recommends should be read as demands) is that you keep a contemporaneous log of your business travel. This means you must record:
- Where you went
- How many miles you drove for business during that day
- The purpose of the transportation (meeting, banking, picking up supplies, visiting job site, etc.)
In a perfect world, this log would be filled out daily, but in the not so perfect world that most of us live in, it should at least be filled out weekly. As I said earlier, the IRS wants a contemporaneous log, not a book that you produce two and a half years after the fact once you’ve learned you are being audited. An agent can usually tell the difference between a log kept contemporaneously and a log done the night before the audit.
The good thing about the log is that it is prima facie evidence. The IRS really cannot dispute any of the entries in a log provided they are reasonable. (For instance saying you drove over 5,000 miles in one day, is probably not going to be considered reasonable.)
This log is also important and useful in figuring out the extent of your automobile deduction for your business. The amount of business miles that you log on a daily/weekly basis adds up to the total business miles for that year. In addition to your contemporaneous log, you are also responsible for keeping track of the odometer reading at the beginning and end of the year, which gives you the total amount of miles put on the car for the year. By dividing the amount of business miles by the total miles driven gives you the percentage of business use. That percentage is then used to calculate the percentage of depreciation, gas that you consumed, repairs and insurance, etc. for deduction purposes.
The IRS has become very strict in this area, so keeping these rules in mind is very important in case you ever get audited for automobile deductions.