The tax deadline is just around the corner and, with several software options on the market now, entering last year’s info into the program seems like the obvious thing to do. However, doing your own taxes is only half the battle. Figuring out what is deductible and what is not is also important.
In the first year of a business you must determine whether to use the actual expenses of your vehicle or the allowable mileage reimbursement. For 2020 the IRS allows you to claim 57.5 cents per business mile driven. The IRS releases the mileage reimbursement rate each year.
Whether driving around to source products for your business or traveling to meet with a potential customer, substantiating vehicle expenses is a must. If you choose to deduct the actual vehicle expenses adequate records must be kept as evidence. The records must support the:
- Time and place of the expense
- Business purpose
This rule requires that taxpayers who want to claim car and truck expenses maintain a contemporaneous log, diary or receipts to substantiate that the expenses were legitimate.
There have been cases where taxpayers have claimed car and truck expenses without having the proper documentation only to get audited by the IRS and stuck with a surprising tax bill. This highlights the need for regular bookkeeping and documentation of both income and expenses. At the end of the day the responsibility is on the taxpayer to prove his or her expenses.