Self-Employed or Freelance? Maximize Your Business Mileage Tax Deduction
An important part of maximizing the profit from your own business - no matter how small - is to be smart with taxes. If you are running a side business on top of your day job, you may be paying around 50 cents of every dollar made towards taxes. This means, that for every $1 in tax deductions you find, you are keeping an extra 50 cents in your pocket.
One of the more tedious tax deductions for self-employed folks is deducting transportation expenses. The simplest way to claim this deduction for those without vehicles used solely for business is to track the number of miles driven for business use. (You can also record actual automobile expenses like gas and maintenance, and pro-rate.) The IRS just announced yesterday that the standard mileage deduction will be 58.5 cents/mile for all business miles driven for the last half of 2008, up from 50.5 cents/mile.
From above, this means that for every single business mile you deduct, you might save around 29 cents. Deducting just 100 miles per month would save you around $350 over a year. Put another way, not tracking 100 miles a month will lose you $350 a year. There are many complex rules for what constitutes eligible business travel, but it can be worth asking your accountant or reading up. Here are some examples:
- Driving to the office supply store to make business purchases.
- Driving from your home office to an external location meet a client.
- Driving to the bank to deposit checks or make other business transactions.
- Driving to pick up mail from your UPS Store or P.O. Box.
- Driving to the post office to send business-related mail or buy stamps.
Many times, you might do this stuff without a second thought. But with gas costs so high, I would argue that we need to recoup whatever we can get. Trust me, these miles can add up quickly!
How do I properly track such mileage? At most office supply stores you can buy a mileage logbook. Or, simply start up a spreadsheet program and create these columns: date, purpose (bank, etc.), odometer start value, odometer stop value. Print it out, slap it on a clipboard, and stick it permanently in your car like I do. Record everything immediately, it should take seconds; you can add up the miles later. (Added: mileage log template for Excel)
What about driving from my self-employed home office to my day job with another employer? Nope, although it would be sweet to deduct such commuting costs, this is not qualified business travel. However, if you have a second site for your own business like a storefront, travel to/from your home office to/from that site can be deductible.
What if my UPS mailbox is next to my day job? Here’s where things get a bit fuzzy. You definitely aren’t allowed to deduct personal trips. But let’s say the supermarket is right next to your business bank. Since you’re already there, isn’t doing some grocery shopping the the eco-friendly thing to do? From my non-official understanding, you would need to prove that your trip to the bank is necessary and the primary reason for the trip, and not just an excuse to go to the supermarket. Making an actual deposit transaction would seem to be sufficient in that regard.
But if you are trying to say that your “business bank” is 30 miles away from your home office and just happens to be the one next door to your 9-5 job, then that may be much harder to justify. It is truly necessary to use that branch?
There’s more… You may also be able deduct mileage driven for charity, medical treatment, job searches, and moving.
References: IRS Publications 535, 463, and 529
Find more in Self-Employment, Taxes | 6/24/08, 5:08am | Trackback
June 24th, 2008 at 6:24 am
What you can do is have your home business PO box near your day job. When you go to work, stop at the PO box first. That makes that part of the commute deductable. Then on your way home stop at the PO box again. That then makes the commute home deductable.
June 24th, 2008 at 6:31 am
As a young and recent freelancer (or independent contractor as companies call it), I’m not familiar with all the different ways I can help my self save taxes at the end of the year.
Besides the IRS website, and and accountants, are there any books or websites that put stuff in laymen’s terms?
One of my questions, for example, would be if I could deduct a brand new computer and accessories I bought which would be used for freelance purposes? Also, if I travel from my full-time job to my freelance jobs, can I deduct that mileage? And, is it as simple as just logging the mileage to claim a deduction for that?
thanks for your help!
Denis
June 24th, 2008 at 7:25 am
[…] To learn how to claim business mileage deductions and travel expenses, visit the IRS website’s “The Cost of Doing Business: Organize Travel and Business Expense”. Are you self-employed? Visit My Money Blog for a great article on Maximizing Your Business Mileage Tax Deduction. […]
June 24th, 2008 at 8:57 am
Denis,
Deducting a computer and accessories would be ok as long as the sole purpose is to use it for your job and its a neccessary expense. For example, don’t keep track of your movie collection or put your son’s video games on the PC.
You should be able to deduct the mileage taveling from your job to freelance jobs so long as it is reasonable. Your not going to get straight up “this is what you can do” vs. “don’t do this” from the IRS.
I would not mark mileage for example from my day job to clients if I can go see those clients at other times and they are closer to my personal residence.
If you claim a deduction the burden of proof falls on the taxpayer to jusitfy the deduction. Logging the mileage daily with business purpose would be sufficent. Keeping it in your head or not having the business purpose of your trip is probably not going to work.
June 24th, 2008 at 9:31 am
Great post! You can also find pre-made Excel mileage logs on Microsoft’s templates page. That’s what I do. I just print a couple pages out and put them on a clip board. You can buy a clipboard that is half the size of the regular ones so that it fits in your glove compartment. Also, it is best to tie a string to a pen and attach it to the clipboard or else you will wind up constantly searching for the dang pen.
Also don’t forget: always record your mileage at the start and the end of every year! You need to record that on your taxes.
June 24th, 2008 at 10:10 am
Jonathan, i am a long time reader but a little shy on commenting. I have a question regarding medical expense fsa (not sure if you would know but you know a lot so you are my best bet). I worked for a company for abt 3 months (march - Mid June 08) and contributed some money towards FSA but i have been told that i won’t be able to use that money now as i no longer work for the company. Its abt $100. What are your thots on this. Appreciate you time.
June 24th, 2008 at 12:04 pm
Thanks for the tip! That was a big slap on the ‘ole forehead - going to start ASAP!
June 24th, 2008 at 2:13 pm
I have a friend (really, she’s a friend, not me) who teaches dance as a second job. She also travels regularly to get training from her own dance teacher - it’s about a half-day drive. I’ve been trying to get her to look into whether those expenses are deductable, and it would probably help me convince her if I could say that her mileage is deductable at this rate. In addition, I’ve been trying to get her to talk to a tax pro about whether the cost of the lessons she gets from her teacher are deductable, and her expenses while she’s gone. I think she’s convinced that she should do it, but not convinced enough to start actually recording expenses.
So what do you guys say - is her travel to/from her teacher for training deductable at this rate? Thanks.
June 24th, 2008 at 2:35 pm
ParatrooperJJ - That is one idea that I’ve heard before. It might be hard to justify a PMB box that is very far away from your home office and/or other clients, but if you have some clients in the area or no other PMB boxes near your home then it might fly.
Gretchen - Good idea. I have my own Excel template, but for some reason I can’t find it. A small clipboard is a good idea, I have a big fat 8.5×11.
Danielle - Good for you
Denis - Like what moneyandpf said, but you might also be able to pro-rate the cost of the computer based on % used for business/personal. For example if the computer is used 80% for business, then 80% of the value might be deductible.
Urvashi - You’d have to ask the administrator company for your FSA. Some FSAs allow reimbursement forms to be filed for a limited time after the end of employment. I’d ask sooner rather than later.
MattJ - I’d say it’s worth talking to a CPA about it. The criteria is that the expense has to be “ordinary and necessary” for her line of work. For example, does she take lessons for any other reasons than to teach dance better?
June 24th, 2008 at 4:18 pm
Added a link to a mileage log template for Excel to original post.
June 25th, 2008 at 8:23 am
Denis - your computer would be an example of a depreciable item; that is, you can deduct it’s cost (or a percentage of its cost if it isn’t used full-time for your business) over its useful life. I think it is 7 years for a computer, but you’d have to look that up, as I don’t think it is a straight fraction each year in any case (that is, assuming 7 years, you don’t get 1/7th each year but some other fraction for each year).
An option is a Section 179 deduction, which allows you, up to a dollar limit, to deduct the entire depreciation in the first year of ownership. Do a search on “Section 179″ to get more information.
June 25th, 2008 at 11:03 am
How this helps if IRS audits? Meaning those logs does not prove anything right?
June 25th, 2008 at 12:24 pm
Thanks for the tips
June 25th, 2008 at 12:38 pm
Mattj,
To me this falls under education expenses as the purpose of her trips is to become a better dance instructor.
In general these expenses can be deducted if the classes are education to maintain or improve skills. However, and this is important, if the classes qualify you for a new trade or business then the deduction is not allowed EVEN if you don’t intend to enter into that business.
I would also question why it takes a half-day to get to this instructor. If a similar type of an instructor could be found ten minutes from his/her house this could be a potential problem.
Without having more information it is hard to determine but this should at least give you a better idea.
Source: IRS Publication 970
June 25th, 2008 at 4:28 pm
I recommend a book called Deduct It, available from Nolo Press. It goes into clear detail about the deductions that apply to small business owners and includes useful examples of mileage deductions.
June 26th, 2008 at 4:29 pm
I can’t imagine what other trade the classes would qualify her for.
The reasons she has to go rather far to see an outside instructor are:
1) Nobody in town is really capable of teaching her, considering the level at which she dances this style. There are things she could learn from the other instructors at her studio (and she does) but to really give a dance lesson, the teacher needs to be significantly better than the student. Teachers at approximately the same level of skill run the danger of enforcing each other’s bad habits.
2) Even if there were teachers in this town capable of teaching her, her boss (the studio owner) wouldn’t allow such an arrangement. Why would any students go to studio A if all of studio A’s instructors take lessons at studio B just down the road? Everyone would take lessons at studio B, no? I’m not sure the IRS would care, but no dance teachers (in this town, anyway) take lessons from a competing studio.
3) That said, her dance teacher sometimes comes here to instruct the teachers and students at the studio where my friend works. When she does, she charges quite a bit more per hour (approximately $50/hour more) and is booked solid for the couple of days she stays. Getting, say, 6 hours of instruction on a weekend by going to the teacher is probably cheaper than than paying for 6 hours of instruction when the teacher comes here. Not that 6 hours of one-on-one instruction would be available for any one person to sign up for anyway.
Thanks for the comments and suggestions.
June 28th, 2008 at 11:49 am
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July 13th, 2008 at 8:46 am
Final question: to claim the business mileage tax deduction, would i have to itemize rather than take standard deduction?
July 13th, 2008 at 5:57 pm
Denis - No, these are business deductions, which are separate from those personal deductions. These would go on Schedule C of your tax return if you are a sole proprietorship.
October 8th, 2008 at 5:47 pm
Hi! I am a massage therapist and I have been working independently for years. But I want to work part time for couple of months in a day spa but I don’t want them to deduct my taxes from my paycheck, I want to keep paying the taxes in the way I’ve been doing all these years with my accountant. What can I do for not being obliged from this spa to pay taxes with them? Is it mandatory legally speaking to deduct my taxes from my paycheck? please, help me!! thank you!