As you know, there are many deductions that you can take as a small business owner. Today I’m going to cover one of the most important tax deductions for your small business: Your business miles.
As you know, there are many deductions that you can take as a small business owner. Today I’m going to cover one of the most important tax deductions for your small business: Your business miles.
Calculating business miles for taxes can be a complicated process. To help you, we’ve broken the process down into four easy steps:
- Make a list of all the places you go more than once a year while conducting business. This should include any place where you meet with clients, go to conferences, or conduct other types of work-related activities.
- Record the total mileage traveled between each location on your list and your home office during the previous year.
- Calculate how many miles you drove per trip. For example, if you drive 500 miles from Los Angeles to San Diego for a meeting, then return home immediately after the meeting ends—you would record this as one trip with a total mileage of 500 miles traveled.
- Add up all the trips from step 2 and divide by 12 months (or whatever number of months it was) to get an average distance traveled per month (or year). You can now use this information when filing your taxes so that you can get back some of what you’ve spent on gas!
The amount of business miles you drive has a significant effect on the amount of taxes you pay. That’s why it’s important to know how to calculate business miles for taxes.
The IRS allows you to deduct your business miles from your taxes as a personal expense, but there are some rules and guidelines that must be followed.
To calculate your business miles for taxes, you need to keep track of all of the miles you drive in one year. You may use either an odometer or an app on your phone that tracks mileage. But remember: if you use an app on your phone, make sure it doesn’t automatically turn off after a certain number of hours or days because doing so would mean that all of your recorded miles would be considered personal rather than business-related.
You can also use a vehicle tracking device if you prefer not to keep track manually (and if your plan allows). This is usually more expensive than keeping track by hand, but it ensures accuracy and saves time in the long run.
How do I calculate business mileage allowance payments?
Business Mileage Allowance Payments are what you pay your employee for using their own vehicle for business journeys. You don’t have to report these payments to HMRC.
Mileage claims should be supported by an expense claim noting the reason for the travel and the number of business miles. Travel from home to a permanent place of work is not considered to be business mileage. A person can have more than one permanent place of work.
There are additional rules regarding payments made through intermediaries.
To calculate the ‘approved amount’, multiply your employee’s business travel miles by the rate per mile for their vehicle.
Rates per business mile
Type of vehicle | First 10,000 miles | Above 10,000 miles |
Cars and vans | 45p | 25p |
Motorcycles | 24p | 24p |
Bikes | 20p | 20p |
If your employee carries another employee in their own car or van on a business journey, you can pay them passenger payments of up to 5p per mile tax-free.
Ask employees to provide periodic VAT fuel receipts to cover the mileage they are claiming for. This will enable you to reclaim 2.5p of VAT on each mile expensed.
What counts as business mileage for self employed
If you’re self-employed and use your vehicle for work, you can deduct many mileage expenses from your taxes. These deductions can include oil changes, maintenance, repairs, tire replacements, rotations, etc.
If you use a car solely for business, you have the right to deduct all expenses related to your work. If you use your personal car for business and personal activities, it’s a bit different. You can only use the expenses associated with conducting business when taking a deduction.
Self-employed Mileage Guide: Get To Know the Laws and Regulations
It’s important for self-employed individuals to fully understand the rules and regulations regarding mileage deductions.
Secondly, while the information within these information hubs acts as a helpful guide, it should not be taken as advice from accounting or tax professionals. You should always review the IRS website for the most accurate and up-to-date information.
In addition, you should consider checking with a tax professional to ensure that you understand all possible requirements for taking tax deductions.
Self-employed Mileage Guide: Two Different Ways To Calculate Mileage Deductions
Self-employed individuals can use two different methods for calculating mileage expenses for tax deductions.
Standard Mileage Rate
If you choose to use this method, your calculations will be subject to IRS requirements. For example, as of January 2023, the standard mileage rate is 65.5 cents (or $0.65.5) per mile according to the IRS.
Actual Expenses
This is another method for self-employed people to claim deductions for business-related activities. With this method, you can list expenses like gas, repairs, insurance, maintenance, etc.
The IRS issues an updated list of what business owners and self-employed individuals can claim when using this method. You can use both methods, but it’s necessary to understand which rules should be applied to each method.
Choose the Method That’s Right for You
Keeping track of your trips and their length (in miles) is critical when using the standard mileage rate. Your deduction is based on how many miles you drive.
For those using actual expenses, keeping track of all expenses is required.
Self-employed Mileage Guide: What To Do When You Own or Lease a Vehicle
To qualify for the standard IRS mileage rate, self-employed individuals or business owners must own or lease the vehicle(s) that they use for work. The criteria for ownership and leasing are a little different.
If You Own the Vehicle
If you have your own vehicle, then you must follow these requirements:
- During your business’s first year of operation, you must use the standard IRS mileage rate. You can switch back and forth between the mileage rate method and the “actual expenses” method for all following years.
- There can be no claimed depreciation deductions on the car, except by the straight-line method. The mileage rate already accounts for depreciation.
- There can be no claim of a section 179 deduction (the vehicle’s special depreciation allowance).
If You Lease Your Vehicle
Here are the regulations you must follow if you leased your vehicle:
- You must use the standard mileage rate for deductions during your first year of operation.
- For all subsequent years, you should use the standard mileage rate method during the entire period the vehicle is being leased, including renewals.
- Simultaneously using five or more vehicles for the business (i.e., fleet operations) is not allowed. It is allowed if you switch between each vehicle.
What Kinds of Vehicles Qualify for Mileage Deduction?
Cars, vans, pickups, panel trucks, etc., are vehicles that qualify for the self-employed mileage deduction.
Self-employed Mileage Guide: How to Keep Track of Your Mileage
The IRS has some specific record-keeping requirements for mileage tax deductions. For all business-related mileage expenses, the IRS requires self-employed individuals and business owners to log the following:
- mileage for each business use
- total mileage for the year
- time, place (your destination), and purpose
You’ll need to record your records at or near the time of the incurred expense. The IRS accepts methods like trip diaries, logs, Excel sheets, etc.
If you are using a vehicle for both personal and business, your records should show the ratio as a percentage. This will include a log of all trips and a calculation of all the times you conducted business.
In the past, drivers have used outdated and time-consuming pen-and-paper mileage tracking methods. Today, mileage tracker apps make things significantly easier.
To make tracking your mileage for tax deductions easy, TripLog’s mileage tracker app provides a robust and sleek way for self-employed individuals and business owners to keep accurate and detailed records.
Self-employed Mileage Guide: Calculating Tax Deductions for Business Usage
Determining what percentage of your vehicle use is business or personal is very important. This calculation isn’t too complex, but examples are always helpful. Let’s take a look:
- Let’s say you have taken ten personal trips over the course of a month, with each trip equaling 20 miles. Total personal miles within that month would come to 200 (10 * 20 = 200).
- Within the same month, say there were three business trips taken that totaled 100 miles.
- When figuring how much you used your vehicle for business, you can divide your business miles by the total number of miles driven.
- Take your 200 personal miles and your 100 business miles and add them up. Here, we get 300 total miles.
- Divide your business miles (100) by your total miles (300). Thus, you have used your personal vehicle for 33% of your total use.
- Multiply the number of business miles with the mileage rate of 65.5 cents.
- This example shows that the business mileage expense for this month would equal $65.50 in (100 * 0.585).
Self-employed Mileage Guide: Transportation That Qualifies for Business Deduction
There is no maximum for the number of miles you can claim for a deduction. Still, you should always keep in mind how many miles you drove for business purposes. There are various additional items to keep in mind while considering mileage deductions for business.
Related: Are You An Independent Contractor Or An Employee?
What Constitutes Business Mileage?
- Driving between two different places of work
- Meeting with clients or customers
- Running errands during the workday (picking up office supplies, etc.)
What Does NOT Constitute Business Mileage?
- Commuting to work from home
- Carrying tools or other business items during a commute
- Having advertising or company information displayed on your vehicle
Self-employed Mileage Guide: Additional Expenses
Self-employed workers should consider that other expenses, such as parking fees, tolls, and related costs incurred when conducting business, often qualify for deductions. These costs do not qualify for deductions if you’re commuting to your place of work.