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I have worked with real estate agents and small business owners for many years to help minimize their taxes. One of the largest tax deductions available to those who drive extensively for business - especially real estate agents who virtually live in their cars - is the business auto deduction. Unfortunately, many owners who qualify for this deduction fail to take full advantage of it. Why? They fail to record their business miles accurately!
If you think failing to track vehicle business use causes an immaterial loss, think again. Every 1,000 miles that go unrecorded costs about $190 in income and self-employment tax! For the average real estate agent who drives over 20,000 business miles a year, a month or two of lax recordkeeping can result in paying thousands in addition tax! That’s a family vacation traded for the convenience of NOT tracking your business miles.
Now, I know tracking business mileage can be a major hassle. Writing down mileage & business purpose every time you get in or out of the car (to keep what the IRS calls a contemporaneously recorded mileage log) can seem a ridiculous waste of time and momentum. Using an app on your phone to track business miles can prove equally distracting. But, the IRS requires documentation for every business-mile deducted. Their view is pretty simple (if not understandable): No proof – no deduction!
Helping business owners document and maximize their auto deduction is why I developed a super-simple method to record business auto use. Here it is.
To track business miles, take the following steps:
If you’re a real estate agent, print directions to all of the listings you currently have as well as properties you commonly show. Make sure you print the route you most commonly take. Print other locations you commonly visit such as your broker’s office, closing attorneys, as well as common trips between work locations.
You will notice that each printed route includes the mileage for each trip. The purpose of this step is to obtain irrefutable proof of the distances you commonly travel. As new common trips arise, print them out. Keep in mind, however, that the deductibility of these trips may depend on whether or not you have a home office.
Place the printed directions in a folder or manila envelope for safe keeping. You may also want to write the mileage of the enclosed routes on the outside of the folder/ envelope so they are handy when you need them.
Now that you know (and can prove) the distances you commonly drive, use your calendar to record your trips. It’s that simple. By recording your trips on the calendar, you’re creating a trip journal that records where you went and when you went there.
You will also want to record the purpose of the trip. For example, if your first trip from your home office was to show the Reynold home to Mr. and Mrs. Williams, record “1. Williams to Reynold home.” If you then took them to the Shoemaker's house record “2. Williams: Reynold to Shoemaker home.”
Steps one and two provide all of the information you need to prove your auto deduction. Now all you need to do total the miles you have driven. Grab your calendar and mileage folder and record your mileage. You can calculate your mileage when convenient; weekly, monthly, or – poor you – annually.
This simple process will provide all of the information you need to track your business miles and maximize your auto deduction while substantiating the mileage you deduct. The only additional step you will need to take is to record the mileage on your odometer once per year, preferably on January first. You will need the odometer reading to calculate the total number of miles the vehicle was driven during the year. The IRS requires this information. It is also required to determine the percentage of actual auto expenses you can deduct if you utilize the actual expense method of deducting business auto use.
Finally, remember to record any oddball business trips that aren’t part of your routine and to track mileage separately for each vehicle if you use more than one vehicle for business.
Although all business owners who regularly use their vehicle for business will benefit from this tracking method, it was designed primarily for real estate agents. If you’re a real estate agent interested in minimizing your largest expense – TAXES - we invite you to browse our course listing. To maximize your auto deduction check out our Auto and Home Office Deduction for Real Estate Agents course. For a complete understanding of how to legally keep more of your hard-earned money, our Comprehensive Real Estate Agent Tax-Cut Library is for you! Are you a Real Estate Broker? Our Brokers Edition allows you to share the Library with up to twenty agents!
All courses and articles are for informational purposes only and do not constitute tax advice. Taxes are complicated - do not act on course information without consulting a professional. Always refer to treasury regulation before making any tax decision. Read the full disclaimer.
This course package is thorough and will give you a solid handle on how to optimize your business expenses to minimize your taxes and keep appropriate records to handle any IRS challenges. Only want to dive into a particular topic? Jump to that video and scan forward to where your issue is addressed. Or watch the whole series to learn it all!- Josh, Charles Town, WV, Real Estate Agent Tax-Cut Library, Agent Edition Course
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