Tracking Mileage for Business: IRS Rules and Best Practices

How to document your trips, select a method and protect the deduction

Precise mileage capture is vital to obtaining vehicle-related business expense deductions and compliant reimbursing. Whether you only get behind the wheel on an occasional basis for client meetings or rack up hundreds of miles per month, making a habit of doing things the same way lessens your audit risk and allows you to take full advantage of legitimate tax write-offs. This guide spells out the basics of IRS rules in simple terms and gives you easy guidelines to follow.

Understanding the two basic methods

There are two methods to deducting auto expenses: the standard miles method and the actual expense method. Under the standard mileage method, a single fixed amount is applied to deductible business miles. The second of two methods, the actual expense method requires you take your vehicle expenses (such as fuel costs, insurance premiums, maintenance and repairs, registration fees or taxes, depreciation) and calculate how much was used for business according to the records kept of miles driven. Each of these approaches has different recordkeeping requirements and long-term implications, so pick based on your tax situation.

What counts as business miles

Generally, business miles involve travel to client meetings, jobsite visits, business errands (e.g. bank) or deliveries and trips between alternative work-sites. Commuting — travel between your home and a regular place of business — is generally considered personal, and not deductible. Trips that are mixed between business and personal mileage should be recorded with the miles listed to either side of the equation (business and personal), along with a brief explanation of the reason for travel.

Essential information to record

A proper mileage log includes certain details with each trip you take. At minimum, capture:

• Date of the trip.
• Beginning and ending odometer readings or actual miles driven.
• Trip start and end (city or street level).
• Business reason or client name.
• If the trip was round-trip or one-way.

If you opt for the actual expense method, retain supporting receipt for things like fuel, maintenance and insurance as well lease payments and registration fees. Preserve records of what you paid for the vehicle and any other information that proves your business use percentage.

Timing and frequency of recordkeeping

Record mileage contemporaneously whenever possible. Daily or trip-by-trip entries minimize gaps in updates, decrease guesswork for reconstruction, and stand up better under review. If you re-create mileage after the fact, use calendars, appointment logs and electronic records to confirm entries. But reconstructed logs usually are subject to more scrutiny than contemporaneous ones.

Switching methods and restrictions

Some taxpayers might choose to alternate between using the standard mileage and actual expense methods. There are rules that can limit switching based on prior elections and whether or not the vehicle had been previously depreciated under certain rules. When switching, factor in the long-term tax effect and seek the advice of a tax professional in complex cases. Often there is flexibility, but the choice of method can influence depreciation and deductions down the road.

Reimbursements for employees and contractors

Employers have the option of reimbursing drivers for business mileage. Reimbursements under an accountable plan, where employees account for miles and payoff any extra advances—are generally considered to be non-taxable. An employer’s policy for reimbursement should include the same minimum requirements for trip documentation as above. Independent contractors typically write off mileage as a business expense on their tax filings, and should keep equally detailed records in much the same manner employees do.

Audit preparedness and documentation retention

If you’re audited, clear and consistent records win credibility. Hold on to mileage logs, receipts, appointment books and calendars for the time period required by tax authorities (usually a number of years). Wherever you can, tie mileage entries to invoices, itineraries or meeting notes that indicate business purpose. Or you could manage records in a way that makes them easy to access: such as monthly files, digital copies with search functionality or an indexable binder.

Single-for-life habits that save time and stress

• Track trips as you go. A small daily habit keeps the details from slipping through the cracks.
• Standardize the format of entries so that reviews and reconciliations are speedy.
• Monthly certainly test the odometer and check for missed entries or errors.
• Maintain a separate receipt file of fuel expense if you elect actual expenses.
• Identify combined-purpose trips along with estimates of what percentage was business vs. personal.

Year-end review and tax filing evaluations

Compare total business miles at year end, and compare them with recent years to identify any anomalies. Fill out a record sheet, totaling miles by purpose and providing an explanation if any weeks have very high or low mileage. Connect summaries to tax records and save backup documentation in the event of questions. If you deduct vehicle expenses on your tax return, double-check totals against supporting schedules and receipts.

Common pitfalls to avoid

• Using sweeping terms such as “business there” without client specifics or purpose of the trip.
• Deduct commuting as personal travel.
• Not keeping a record of odometer readings, or just going by feel.
• Business and personal receipts are mixed without clear distinction.

Final thoughts

Proper business mileage tracking is a combination of staying organized with your records and knowing the methods available when it comes to deductions. Strikethrough logs, chronological entries and organized receipts reduce the risk of an audit and provide a seamless way to substantiate legitimate write-offs or deductions. All you need to do is set up a structure and choose the method that’s best for your circumstances, keeping organized records so you can defend your mileage claims and maximize them.

It’s just like that, but for mileage tracking: You safeguard your deductions and streamline reimbursements while avoiding the year-end-tax-scramble headache.