An individual required to drive for work is permitted to take a mileage deduction on her federal income tax return upon meeting certain criteria. Additionally, individuals that capitalize on this opportunity must document the travels and be prepared to present supporting evidence on how the deduction is calculated. If these obligations are met, the taxpayer enjoys the benefit of having her income tax reduced.
1. Qualify for Mileage Deduction
Prior to logging information for a potential mileage deduction, certain criteria must be met to take the benefit. A taxpayer can take the mileage deduction for travel from the office to a work site, from the office to a second place of business or for driving to business-related errands. In addition, a taxpayer can include trips made meeting with clients, going to the airport, visiting customers for business or searching for a new job in the same industry.
2. Determine Method of Calculation
A taxpayer can choose between two alternatives of accounting for the mileage deduction amount. The two methods vary, as one does not require the maintenance of a mileage log. If a taxpayer elects to take the standard mileage deduction, she only needs to maintain a log of qualifying mileage driven. If she elects to deduct actual vehicle expenses for the year, she must retain all receipts and relevant documentation relating to charges made for the vehicle.
3. Record Odometer at Start of Tax Year
The Internal Revenue Service (IRS) requires a taxpayer to record the odometer of business vehicles at the beginning of the tax year. This information is documented on Form 2106. If the vehicle is purchased during the year and is not new, the taxpayer must record the odometer reading from the first day it is deployed.
4. Maintain Driving Log (If Needed)
If a taxpayer chooses the standard mileage deduction, she must keep a log of miles driven. The IRS requires specific information to be maintained, or she may be subject to disqualification from taking the deduction. At the start of each trip, the taxpayer marks the vehicle’s odometer reading and lists the purpose, starting location, ending location and date of the trip. Upon the conclusion of the trip, she notes the final odometer reading and subtracts this figure from the beginning reading to find the total mileage for the trip. The driving log should be maintained in a timely manner with specific details, as estimates and rounding are not permitted.
5. Maintain Record of Receipts (If Needed)
If a taxpayer chooses the actual expense deduction, she is not required to maintain a mileage log. Instead, she must keep copies of relevant receipts and documentation. Each document must include the date, dollar amount of the service or service purchased, and information relating to the actual good or service provided.
6. Record Odometer at End of Tax Year
At the end of the tax year, the taxpayer records the ending odometer reading. This figure is used in conjunction with the odometer reading at the beginning of the year to calculate total miles driven in the car for the year. The information, including what percentage of miles driven were for business purposes, is required on Form 2106.
7. Record Mileage Onto Tax Return
At the conclusion of the tax year, a taxpayer lists the total amount of miles driven on Form 2106, Line 13. This figure is calculated by the standard mileage rate for the year to determine the dollar deductible amount. Alternatively, she can organize the receipts of the actual expenses into groups, including gasoline, oil, repairs, insurance, vehicle rentals and depreciation.
8. Retain Documentation
A taxpayer must retain the documentation relating to a mileage deduction for at least three years. If documentation is requested from the IRS to substantiate the calculations of the mileage deduction, the taxpayer should retain a copy of the records before dispersing the information to the taxing authorities. To minimize the risk of losing information, she should maintain a separate physical log for each separate tax year.