The short answer is yes! As a business owner, if you don't want to miss out on your tax deductions, you need to track your miles - both your business miles and the total number of miles driven in a year. What you do with those mileage logs is slightly different, depending on whether you are a sole proprietor or single member LLC filing Sch C or whether you are an S-corp filing Schedule C.
I'm a single member LLC. How do I deduct car and truck expenses?
If you are a sole proprietor or single member LLC filing Schedule C, you can take a tax deduction for business use of your car or truck, whether or not the vehicle is owned in the name of the business. The allowable deduction is figured in one of two ways:
- the standard IRS rate (.56/mile in 2021), or
- a percentage of actual expenses (based on business miles driven compared to total miles driven).
Do I need to track my business miles?
With either method, you need to track the miles you drive for business and your total miles driven for the year. There is an integrated mileage tracker in QuickBooks Online or you can use another mileage tracking app such as MileIQ. A pen and paper log also works.
If you don't want to track your non-business miles for each trip, then make sure you take note of your odometer reading on Jan 1 each year, so that you know total miles driven, not just business miles. Maybe make a note in your calendar right now to remind yourself. 🙂
Should I pay for gas, maintenance, and other vehicle expenses out of my business account?
If you file Schedule C, this is really up to you. If you pay for gas or other auto expenses out of your business account and then end up using the standard IRS rate on your tax return, these expenses will be recharacterized as owner draws, rather than deductible expenses--and then a new deduction at the standard IRS mileage rate will be added on your tax return.
For this reason, auto expenses are sometime tracked in the "Other Expenses" section of the Chart of Accounts.
Which method of deducting vehicle expenses is better?
Generally the standard IRS rate is easier to track and works out in your favor. However, if you have high vehicle expenses, the percentage of actual expenses method may turn out to be better for you.
Note that if you want to use the percentage of expenses method you will need to document of ALL vehicle expenses, not just business-related expenses. This means all gas, insurance, licensing, and maintenance.
I am incorporated as an S-Corp. How do I write off business miles?
If you are an S-Corp, things are slightly different. If the vehicle is owned in the company's name, then you will deduct actual expenses. You will also need to document any personal miles driven as a fringe benefit through payroll.
If the vehicle is in your personal name, but you are using it for business, then you should use reimburse yourself through what is called an accountable plan. Home office expenses can be reimbursed in the same way.
An accountable plan for vehicle expense reimbursement should be based on a mileage reimbursement or actual expenses.
- Mileage Reimbursement. Mileage is logged and submitted on timely and routine basis (e.g. monthly). The log should show the date, business purpose of the trip, and miles driven. Expenses can be reimbursed on the owner's (or other employee's) paycheck and will not be subject to W-2 withholdings.
- Actual Expense Reimbursement. This type of plan is somewhat more cumbersome. Actual receipts must be saved and submitted. The accountable plan should detail what expenses are covered (is gas and oil changes covered but not new tires?). In addition, the plan should require that employees track all miles driven and what percentage of those miles are for business. Only the qualified percentage of actual expenses can be reimbursed to the employee.
If you do not have an accountable plan in place, you can still reimburse for mileage (at any rate you choose) or actual expenses, but these reimbursements must be included on your W-2 as wages and are subject to employment and income tax withholding.