home office deduction

The Mileage Deduction: What to Know About Using Your Car For Business

Do you drive in the course of running your business? If so, there’s a tax benefit you might be able to take advantage of. The miles you put on your odometer or the cost of using your car for the following types of drives can be deducted from your business taxes:

  • Drives between offices – If your business has more than one office, you can deduct the cost of driving between the different places you work.

  • Drives between job sites – Some businesses, like home service contractors, often have multiple jobs taking place at different locations. Like offices, the cost of driving between job sites is deductible.

  • Drives to and from client meetings – You can deduct the cost of driving to meet your clients, whether it be at their home, place of business or another location, like a restaurant or coffeeshop.

  • Drives to and from the airport (or other places you travel from) – The cost of any drives you make to take more extensive travel for business, like to an airport or train station, can be deducted.

  • Drives to run business errands – Any driving you do to pick up supplies or take care of other tasks for your business is tax deductible.

By and large, any costs you incur when driving in the course of running your business can be deducted from your taxes. However, one of the biggest mistakes business owners make is also including the cost of driving between their home and where they work. The IRS clearly states that commuting to and from your home is not business travel and cannot be claimed as an operating expense. That being said, there are two exceptions to this rule.

You have a home office

If you run your business from home, commuting to and from your residence is the same as driving between offices. However, the area of your house you work from must meet the IRS requirements for a home office. You can learn what qualifies as a home office for tax purposes in this blog post.

You’re commuting between your home and a temporary office

This IRS allows you to deduct the cost of driving between your home and a temporary work location that is not your primary place of business. You must work from the location for less than a year for it to be considered temporary.

Calculating your vehicle deduction

You can determine your vehicle deduction using the standard mileage rate or by calculating the actual expenses associated with using your car for business purposes. There are some restrictions to which method can be used by certain businesses that are outlined on the IRS website.

Standard Mileage Rate

The standard mileage rate is easier to calculate and often comes out to a bigger deduction. Using this method, you can deduct 54 cents for each mile you drive for business purposes this year (note that 54 cents per mile is the 2016 rate).

Actual Expenses

Your other option is to calculate the actual expense of using your vehicle for business purposes. Using this method, you add up the annual costs of gas, maintenance/repairs, insurance, registration fees, and depreciation in order to determine your total vehicle costs for the given year. You then figure out what portion of your total mileage is attributable to business travel and take that percentage from the total annual vehicle cost to determine your deduction.

If you have a dedicated vehicle that is used solely for your business, figuring out your annual business mileage is simple. All you need to do is subtract the mileage on the odometer at the start of the year from the odometer reading at the end of the year. The difference is your annual mileage.

If you have a vehicle that you use for both business and personal means, tracking your annual business mileage is more complicated. You’ll need to keep the miles you drive exclusively for work separate from the miles you drive for personal reasons in order to have an accurate vehicle deduction. The good news is there are a few good mobile applications that use GPS to track and log miles driven for business purposes.

BookKeeping Express (BKE) can help you track your expenses and prepare for your tax filing. Visit our features page to learn more. 

 

The Home Office Deduction: How to Qualify and Calculate

When you first start a business, running it from home makes a lot of sense. Renting a workplace often isn’t practical when you’re trying to keep costs low. And it’s easier than ever to reach potential customers and stay in touch with colleagues and partners from the comfort of your own home.

Most business owners who have an office or workspace at home understand they can possibly deduct the expense from their taxes. But they might not completely understand the requirements and how to go about calculating the deduction.

Determining if you have a home office

The IRS has two clear requirements for deducting a home office expense from your taxes. The first rule states that the area of the home you work from must be exclusively used for business activity, on a regular basis. That means you can’t consider your living room or kitchen a home office for tax purposes. Even if you really do run your business from your couch or kitchen table, those areas of your home aren’t used solely for business activity. You can convert an extra room into a home office, such as your basement or a spare bedroom, but it needs to used only for business operations. Also, if you have a separate structure on your property devoted to business activity, like a barn, studio, or workshop, you’re likely in good shape.

The second requirement says that your home must be your principal place of business. This doesn’t necessarily mean you can’t claim a home office if you also have a dedicated workspace off your personal property. You just have to use your home office “substantially and regularly,” in the words of the IRS. This means the bulk of your business activity should be conducted from your home.  

What’s deductible?

You’ve determined that you really do have a home office that is used exclusively for your business, on a regular basis. Great! But what exactly can you claim on your taxes?

Costs directly associated with the home office can be fully deducted. For example, if you renovate your home office you can claim it as an asset and depreciate it over time.

You can also deduct a portion of your regular home expenses. Your mortgage/rent, utilities, property taxes, repairs, condo/neighborhood association fees, and depreciation can all be partially deducted. Even if the repair happened in a part of your home that is separate from your office, you can still partially deduct it.

Calculating your deduction

You can claim $5 per square foot for up to 300 square feet for your home office deduction. In order to calculate, start by determining the percentage of square footage of your home that is used for business activity. Then figure out the total annual cost of your home by adding up all your expenses from the previous year. Whatever percentage of your home is devoted to business use is the same percentage of your total annual home cost that can be deducted from your business taxes.

Let’s say you have a home that is 2,500 total square feet and you run your business from an office that is 250 square feet. The office space takes up 10 percent of your home, so you can deduct 10 percent of your total annual home costs from your business taxes. Be sure to keep in mind that your deduction cannot exceed $1,250 in this case because that would be more than $5 per square foot.

Keep your records

Most business owners don’t pay personal expenses, like mortgage payments or utilities bills, from their business bank account. Instead, they likely get paid a salary or take a draw from the business and use those funds to pay for living expenses. In this case, it’s very important to hold on to the proper records, like utility bills or paid invoices for repairs. In the event the IRS audits your tax filing, having the proper documentation will prove that your home office deduction is accurate.

Any home-based business owner should take advantage of home office deductions. Just remember to make sure you qualify, calculate your deductions correctly and to hold onto the proper documents.

BookKeeping Express (BKE) is an accounting and bookkeeping firm, serving clients nationwide. Visit our features page to learn how we can help your business.