The Independent Business Owners Association International, Inc. (IBOAI) is the advocacy organization for North American Independent Business Owners (IBOs) affiliated with Amway®. The IBOAI advises Amway on every facet of the North American business, from products and promotions to operations and business guidelines. The IBOAI and Amway are dedicated to partnering for success with your input, support and participation.
The nature of your business may result in a significant amount of automobile travel, particularly in the early stages of building your business. This is an expense that requires very detailed documentation and substantiation in order to obtain the deductions that you are allowed.
There are two methods for determining the amount of auto expense you report for the year: standard mileage rate or actual expense. In either case, when you use your vehicle for both business and personal use, you must apportion your expenses between such personal use and business use. Remember that you cannot deduct the portion of your auto expenses resulting from personal use or commuting to and from work. You should begin then by regularly recording the miles you drive on daily business trips. The simplest and most logical place for you to do this, once again, is in your daily planner.
Enter each business trip in your daily planner and record the number of miles you drive per trip. Next to each mileage entry, note the 4 Ws: who, where, when and why. The "why" will always include the business purpose of your trip. For simplicity, you might use codes or symbols for the more common purposes. Examples could include "STP" for showing the Plan, "R" for rallies, "B" for trips to the bank, "D" for customer deliveries, and so on. The "who" would be the name and address of whomever you're calling on. If you are going to an open opportunity business meeting, record the name and address of the person hosting the meeting, the name of the speaker, and the name(s) of any prospects you take with you. Record the names of all the people that you show the Plan to, even if they do not end up coming into the business. It's also a very good idea to record the names, if you know them, even of the people you prospect as well as your method for prospecting. Finally, keep copies of your upline newsletters to substantiate any open meetings, rallies, training sessions, and other business functions for which you've traveled to attend.
Mileage incurred commuting to and from work generally is not deductible, while mileage incurred in pursuit of your business is deductible. I.R.S. rules also provide generally that for auto expenses to be deductible you must embark from your primary place of business, which is the home for most IBOs. Now, this presents some interesting scenarios if you're like many successful IBOs, who periodically conduct business at lunchtime or when traveling to and from work.
What if you drive to work in the morning (nondeductible commuting mileage), then you drive to meet a prospect with whom you share the Plan at lunch? The mileage from your work to your lunch meeting and back is deductible, since it was solely for business reasons. What if you meet with your downline on your way home from work? Your mileage from your work to your after-work meeting is deductible. But your mileage from your after-work meeting to your home is not; that's considered part of your commute. The next morning, on the way to work, what if you stop to counsel with your upline about your business? The miles from your home to your first stop are deductible since you left your primary place of business to go on a business trip. Yet the mileage from the business stop to your work again is part of your commute. Sound detailed? Yes, but every legitimate, deductible mile counts, so it's a worthwhile task.
To make a proper automobile expense deduction, you will first separate your personal and commuting mileage from your documented business miles. Take the odometer readings from your vehicle at the beginning and end of the year to determine total annual miles driven. Total miles driven per year, less the number of documented business miles, should leave you with your total personal and commuting mileage. Next, to separate your commuting and personal mileage, determine the round trip miles to and from your work and multiply that by the estimated number of days you worked during the year.
+ Commuting Miles
+ Personal Miles
= Total Miles for Year
Business, commuting, and personal mileage totals are all required to be listed on the back of the Schedule C. Failure to include any of the three totals may raise an audit flag that you are not keeping adequate mileage records, or that you might be trying to deduct nondeductible mileage. Also, be sure to fully answer the questions on Part IV of the Schedule C (Lines 45a and 45b), acknowledging that you have evidence to support your deduction and that your evidence is in writing.
Once you have verified your business mileage, then you must choose your method for deducting your auto expenses. If you choose the standard mileage go to www.irs.gov and search "standard mileage rate". This rate varies from year to year as the cost of operating a vehicle changes, or you may deduct a percentage of your total automobile expenses for the year equal to the percentage of business use as determined by your mileage calculations (actual expense deduction). Actual automobile expenses include gas, oil changes, repairs, insurance, depreciation, personal property taxes (license plate fees), interest expenses, etc. Note that parking and tolls incurred on business trips are a separately deductible business expense, and should not be included with your automobile expenses.
If you are working hard at building your business and, as a result, driving a lot of miles, then the standard mileage rate generally yields a higher deduction for your automobile use. If you elect to use the standard mileage rate to deduct your auto expenses, then you cannot deduct any other auto expenses, except perhaps the interest paid on your auto loan. You may take the standard mileage rate deduction in addition to the interest expense on your auto loan in an amount proportionate to your business use. For instance, if your calculations reveal that 40% of your auto use was for business, then, under the standard mileage rate deduction, you may additionally deduct 40% of your auto loan interest for that car. The standard mileage rate changes frequently, so check with your accountant or consult the applicable I.R.S. guidelines for current rates.
If you elect the actual expense method, you should seek assistance with calculating depreciation expense. The depreciation allowance is limited, complicated, and changes on an annual basis. Note that you cannot recover the standard mileage rate and depreciation at the same time. Once you select either the actual expense method or the standard mileage rate method to report automobile expense deductions you must continue with that method until you change vehicles. At that time you may again select which method you wish to use.
It's generally a good idea to keep all gas and repair receipts for the year no matter which expense method you choose for your automobile. Under either method, you must be able to substantiate that you actually drove the miles claimed. Receipts for gas, oil changes, and repairs are generally the best evidence.
Recording automobile expenses is tedious work, but don't you get tired of using that pencil and daily planner! Believe me, it will be well worth every minute of time spent properly documenting your automobile's use. Besides, it's just good business practice to do so. Records well kept, especially pertaining to automobile and travel expenses, could save you hundreds or even thousands of dollars in the event of an audit. So use your tools to keep track of your expenses just as eagerly as if someone were standing beside you now, offering you that money to record the information.