Know how to take this new 2022 deduction properly
Sky high gas prices have drivers feeling the burn this summer as they plan holiday road trips or make their daily commute to and from the office.
The national average price of gas has topped $5 per gallon, according to AAA, a new record and an increase of more than 58 cents from just a month ago. In some places it’s even higher, like California where the average gas price per gallon is $6.43, or Illinois where of this writing is $5.56.
In recognition of newfound pain at the pump, the IRS has made a special adjustment to allowable gas milage deductions for the final months of 2022. For the rest of the year, the standard mileage rate for business travel will be 62.5 cents per mile, up 4 cents from the rate effective at the start of the year.
The IRS annually updates the mileage rates in the fall for the next calendar year. However, these new rates are effective July 1, 2022. For travel from Jan. 1 through June 30, 2022, taxpayers should use the rates set forth in Notice 2022-03.
What Qualifies as Business Milage?
First things first, commuting to and from the business does not qualify as business miles. However, if you have more than one dental office, the rule can be a little different.
Driving to one dental practice is considered commuting and does not qualify; however, if you subsequently drive to a second (or third) location during the course of business, these miles can be deducted. The trip home can be partially deducted outside of what would be the original commuting miles from the original trip.
It can be complicated. Let’s look at an example:
- Traveling from home to office 1 is a 10 mile drive. This is considered a commute and non-deductible.
- Traveling from office 1 to office 2 is a 20 mile drive. These are deductible business miles.
- Traveling from office 2 to home is a 30 mile drive. In this case, 20 miles are deductible. The other 10 are “commuting miles” because a commute is round trip.
Trips to the bank, post office or a store to purchase supplies also qualify.
Tax Director Kristina Yarbrough shares other examples of business miles you can deduct, when driving for a business-related reason. These miles generally can be calculated starting at home, as it is not your place of employment:
- Driving to the post office
- Driving to the bank to deposit business money
- Driving to the office supply store or other stores to buy supplies for the office
- Driving around town to drop off marketing supplies to referrals
- Driving to lunch to meet a business partner to discuss business
- Driving to a business dinner to discuss business
- Driving to a business conference such as a continuing education event
- Driving to CWA to attend the annual consult meeting
Actual Cost Method Versus Milage
If you qualify to deduct vehicle expenses, you can choose to deduct your actual expenses or your mileage.
Under the Actual Cost Method, you must first determine the percentage you use the vehicle for business purposes. You then multiply the percentage by the total costs associated with owning the vehicle during the year to arrive at your annual deduction. This could include fuel, oil changes, tires, insurance, repairs and maintenance, registration and licensing fees, leasing fees and/or interest on the loan. Mileage refers to the number of miles you drive for business-related activities.
For example, if you drive six miles to the supply store to purchase supplies, you can claim 12 miles for that round-trip. Multiplying 12 x 0.625 gets you a $7.50 deduction on your taxes.
You might choose to deduct the actual cost of owning instead of mileage if you’re claiming all auto expenses, such as oil, repairs, tolls, loan cost, taxes, tags, parking and insurance. In cases where you don’t drive the car much, this might be the better option. Your tax professional can advise you here, but you must choose one or the other.
Either way, you’ll need detailed record-keeping.
Contemporaneous Record Keeping
This IRS adjustment is an opportunity for additional savings for taxpayers. Accurate record keeping of mileage and travel is essential to start now.
Real time record keeping is always best since that eliminates confusion or trying to remember little details later. You can keep a simple paper mileage log in your car, or you can make it easy and use a mileage/maps app. In each instance, be sure to record the date, total miles driven, and purpose of your trip—the more information, the better.
Technically, you are supposed to track all your miles for the year. However, previous court cases have allowed taxpayers to set a precedence for the year by tracking two to three months of business miles, calculating the average of those months and using that to span the rest of the year.
- Month 1: 200 recorded business miles
- Month 2: 150 recorded business miles
- Month 3: 300 business miles
The average of those would be 216 miles, which would allow you to deduct 2,600 miles (216 x 12) for the year. Based on several audits that our tax accountants have gone through, this has been sufficient, but only if the taxpayer can prove that they always have business miles every month and their routine was similar each month. If the routine is not similar each month this method will not be allowed.
Avoid IRS Audit
Mileage deductions are an area that the IRS tends to scrutinize more closely than others. An important concept to understand about any business deduction is that your records are supposed to be “contemporaneous.” This means they must be kept while they are being incurred. The IRS does not have to take any of your records if you did not create them contemporaneously.
The increase in the mileage rate is unlikely to take the sting off your next gas station visit, but, when it comes to tax deductions, every little bit helps.
Reducing your tax burden is essential to reaching long-term financial goals. Working alongside the financial planning team, our in-house tax professionals play an integral role in helping our clients ensure we’ve exhausted all measures in reducing any tax liabilities.