Business mileage deduction vs. commuting

Business mileage deduction

Expenses for qualified business use that are properly documented are deductible using either actual expenses or the mileage method.

• Qualified business use is travel for ordinary and necessary business travel
• Documentation must include:
  • Amount – the mileage for each business use, date you started using the vehicle for business and the total miles (business and personal) for the year. You do not have to write down each personal trip, just the business ones. For personal miles you can track the odometer at the beginning and end of the year and from that calculate total miles. Subtracting business miles from the total gives you personal miles.
  • The date of each use
  • Business destination
  • Business purpose of the use

The actual expense method requires you to track all vehicle expenses, yes all, for the year. You take the percentage of business miles are of the total miles and multiply it by the total expenses. I find many taxpayers new to the business vehicle expense deduction only keep fuel purchases while out on business trips. You still have to apply the business use % to these “business” only fuel purchases. That is why you need the total of all vehicle expenses.

Many taxpayers will ask why they cannot just keep the fuel purchases while on business trips. Let us look at an example. Sally Smith has an SUV that gets 12 miles to the gallon that she drives personally and for business. Sally’s only business miles are when she drives from her store to the Post Office, a two mile round-trip. Conveniently, there is a gas station between her store and the Post Office. Any time Sally needs fuel, she volunteers to make the daily trip to the store’s Post Office box. She stops and fills her SUV up with 35 gallons of gas at $3.00 per gallon or $105. With 35 gallons she can drive an average of 420 miles of which two are business. Her actual cost of fuel for the round-trip is $0.50 ($105/420 miles * 2 miles) but deducting the fuel purchased on a business trip would give her a $105 deduction. IRS says that her method does not reflect economic reality and only allows the $0.50 of fuel.

Commuting

Commuting from your residence to your principal place of business is generally not deductible. IRS has made three exceptions (Revenue Ruling 99-7) :

1. “A taxpayer may deduct daily transportation expenses incurred in going between the taxpayer’s residence and a temporary work location outside the metropolitan area where the taxpayer lives and normally works.” (Emphasis added) While I am not aware of IRS blessing it, the Office of Management and Budget defines Metropolitan Areas (downloads as PDF) for statistical purposes. The Raleigh Metropolitan Statistical Area is composed of  Wake, Johnston and Franklin Counties.
2. “If a taxpayer has one or more regular work locations away from the taxpayer’s residence, the taxpayer may deduct daily transportation expenses incurred in going between the taxpayer’s residence and a temporary work location in the same trade or business, regardless of the distance.” (Emphasis added) In Walker V. Commissioner (101 T.C. 537) the Tax Court ruled that since Mr. Walker regularly worked at his residence. Even though he did not qualify for the home office deduction (see item 3), he could deduct travel to temporary locations within the same metropolitan area as his residence. This case was decided under Revenue Ruling 90-23 which has been superseded by Revenue Ruling 99-7. If a taxpayer wants to take the position in the Walker case, they should consider completing Form 8275 – Disclosure Statement alerting the IRS that you are taking a position IRS does not agree with.
3. “If a taxpayer’s residence is the taxpayer’s principal place of business within the meaning of section 280A(c)(1)(A), the taxpayer may deduct daily transportation expenses incurred in going between the residence and another work location in the same trade or business, regardless of whether the other work location is regular or temporary and regardless of the distance.” Section 280A(c)(1)(A) discusses the requirements to claim a home office deduction.

The Revenue Ruling defines temporary as a work location that is realistically expected to last, and does last, one year or less.

These rules apply the same to employees and self-employed taxpayers. There is nothing magical about being self-employed that makes commuting mileage deductible.