The IRS announced they will increase the mileage rate the latter half of 2022. Starting July 1, 2022, the mileage rate has increased to 62.5 center per mile to help ease the strain of the rise in gasoline prices. Business owners will need to report mileage from January 1, 2022 through June 30, 2022, and then from July 1, 2022 through December 31, 2022 to be able to properly deduct business mileage when they file their 2022 tax returns.  

With that out of the way, let’s talk about the mileage deduction!

Mileage is one of the most audited items in a business, as it is one of the highest paying and most abused deductions. It is imperative for business owners to accurately report business mileage. Guessing or using ‘same as last year’ just ain’t it. 

Vehicle Expense Deduction

Business vehicles are cars, SUVS, and pickup trucks that are used for business activities. There are other restrictions to vehicles that qualify for the business use of vehicle deduction. Today’s post is about mileage and expenses. 

There are two ways to deduct vehicle expenses – the actual expense method or standard mileage rate. Here is a brief summary of each method. 

Actual Expense Method

The actual expense method allows a business owner to deduct a portion of actual expenses. This deductible portion is in relation to the amount of business miles to overall miles. 

The expenses included in this method are:
Vehicle loan interest

Insurance

Maintenance and repairs

Tires

Licenses

Registration Fees and taxes

Garage Rent

Parking and tolls

Gas and oil

Rental or Lease payments

Depreciation

With this method, the taxpayer needs to know the total number of miles driven for business and personal use. The deduction amount is the ratio of business miles to total miles driven.

Example

Jack drove a total of 15,000 miles during the taxable year. He reported 8,500 business miles. Jack reported $10,000 of vehicle expenses. What is the amount of his deduction?

8500/15000 = 56.6% – rounded to 57%.

57% of $10,000 (vehicle expenses) = $5700 (not including the depreciation amount).

Standard Mileage rate

Every year Congress sets a standard mileage rate for business miles. For 2022, the rate was originally 58.5 cents per mile for business travel. Because gas prices are higher than Snoop Dogg, Congress increased the mileage rate by 4 cents per mile to 62.5 cents per mile to offset the steep increase in prices. Of those amounts, 26 cents per mile is allocated to depreciation. 

Accurate Mileage Log

The lack of an accurate mileage log gets business owners every time! Regardless of the method you choose, you must have an accurate, detailed mileage log.  An accurate mileage log contains the following information:

Date the trip was taken: (self-explanatory)

Origin: The address where you started. 

Destination: The address of where the trip stopped. 

Number of miles: total miles between the two points
Purpose: List the business purpose.

Your mileage log will also contain the total miles driven for business in a tax period. 

Why It’s Important

In a recent opinion issued by the Tax Court, a taxpayer’s deduction was denied because of a lack of sufficient records. In Pedersen v. Commissioner, the taxpayer claimed a mileage expense as part of Unreimbursed Employee Expenses on his 2016 tax return. Although the case was related to Unreimbursed Employee Expenses, the principles are still the same as they relate to a business.  

The opinion states: “For expenses relating to passenger automobiles, a taxpayer must substantiate with adequate records or sufficient evidence corroborating his statement (1) the amount of each separate expense using either actual costs or the standard mileage rate; (2) the mileage for each business use of the passenger automobile and the total mileage for all purposes during the taxable period; (3) the date of the business use; and (4) the business purpose of the use. See Treas. Reg. § 1.274-5(j)(2); Temp. Treas. Reg. § 1.274-5T(b)(6).” 

While the Internal Revenue Code does not specifically state that one has to list odometer readings, it certainly helps “substantiate with adequate records”. In the end, Mr. Pedersen had to pay back approximately $1000 for disallowed mileage + penalties + interest (which gets compounded daily). 

I’m willing to bet lunch money that the 2022 tax year mileage will be watched closely. It will be very easy for someone to overlook the change in mileage rate change mid-year. On audit, some or all of the mileage could be disallowed, and the difference will have to be paid back to the government. Tax professionals will have to ensure their clients show mileage from January 1 – June 30, 2022 and then July 1 – December 31, 2022.

The mileage rate increase, as of this writing, is temporary. Congress may choose to extend the increased rate through 2023. That remains to be determined. 

If you are being audited, and are in need of assistance, schedule a call with us.