If you are self-employed or an independent contractor and you are using your vehicle for work, the mileage accumulated during your business trips can qualify for self-employment tax deductions. But what about deducting the miles from home to work?
When it comes to driving to work, the IRS has some strict rules for mileage deduction. Depending on the situation, your work-related trips may be considered as commuting, which can make them non-tax deductible.
In this article, we will go over the options you have for mileage tax deductions as well as when your transportation between your home and work can qualify for them.
Let’s start with what the IRS considers “commuting mileage”.
What is considered a commute?
Transportation from your home to your main or regular place of work is defined by the Internal Service Revenue as commuting. A place of work is considered main or regular if you have been working at the same job site for at least one year.
These commutes are considered personal drives, and according to the IRS Commuting Rule, this type of mileage is not a deductible business expense, even if you make business calls or carry business supplies and products during that commute.
But can commuting mileage be tax deductible?
There are two exceptions to the IRS commuting rule, that can allow you to deduct miles from home to work. Let's review them:
The Home Office Loophole
Having a qualifying home office is one way to avoid the IRS Commuting Rule. In this case, because your home qualifies as your principal place of business, you may deduct the cost of any trips made to another business location.
For example, if you have a home office where you do the administrative work for your business, but also have an outside office that you use to meet clients, you can deduct all of your business trips from home to that office. This business trip would be considered a commute if you do not have established your home office.
In order to qualify for home office tax deductions, your home has to be your main place of business. This means the place where you perform most of your administrative and management tasks, have regular meetings with clients, or where you earn most of your income.
Temporary Work Location
Another exception to the IRS commuting rule is when traveling between your home and a temporary work location. This means any place where you realistically expect to perform business-related tasks for less than one year.
There are two scenarios when you would be able to deduct commuting mileage to a temporary work location:
If you have a regular work location (not a home office), you may deduct the commuting to a temporary work location whether this is inside or outside of your metropolitan area (including the area within city limits and the suburbs)
For example, let’s say you are an independent consultant and you have your own office in a downtown building. You are hired for a project that requires you to drive to your client’s office twice a week. The project is expected to last 2 months. You will be able to deduct the cost of driving to your client’s office from home because it qualifies as a temporary work location.
If you do not have a regular work location, you can only deduct the cost of commuting to a temporary work location if this is outside of the metropolitan area where you live.
For example, if you are an estate sale agent, and do not have an established office or formal business address. In this case, you are required to travel from your home to different estate sales each week. You would only be able to deduct these business trips if the homes you are visiting are outside of your metropolitan area.
The actual expenses method allows you to claim deductions for all expenses related to the operation of the car. The car expenses you can deduct include gas, depreciation, insurance and repairs. In this case, you wouldn’t use the information on miles driven for business purposes, you focus on the actual car expenses.
This method can be more time-consuming because it requires you to keep track and documentation of more expenses whereas with the standard method you only need to track your business trips. If you want to use this method, you can use an app to track receipts. This will make tax season a lot easier for you.
Standard mileage rate method:
With this method you can claim a deduction per mile driven for business purposes. If you plan on using his method to claim the mileage deduction, it is important you know how to track mileage for taxes. The set rate is changed by the IRS every year. Starting January 2021, the standard mileage rate is set at 56 cents per mile for business.
You only qualify for the standard mileage rate if you either own or lease the car for business. If you own the car, you must use this method for the first year of use for business purposes, then you may switch methods for the following years. If you lease, you must use the standard mileage rate for the entire lease period.
Also, you cannot use more than four vehicles simultaneously for business purposes, although switching between them is permitted.
If you qualify for both methods, and you are not sure which one to choose, the standard mileage rate method will be better for you in the following situations:
If you have a car that doesn’t require a lot of maintenance or gives you a decent gas mileage. This means you will probably have less car expenses and the rate of 56 cents might get you a higher deduction than the actual expenses.
If you are not good at keeping receipts, you may not have enough documents to prove your car expenses and it will be easier for you to just track tax miles.
You drive a lot of miles in a year (10,000 miles per year will most likely get you a higher deduction)
If you are going to claim a tax deduction under the standard mileage rate method, the IRS requires you to keep a thorough and accurate log for the year's business miles. Each time your vehicle is used for business purposes you have to record the following information:
Date of the trip
Purpose of the trip
Vehicle’s starting mileage
Vehicle’s ending mileage
Any tolls or other trip-related costs
You decide how you want to keep your mileage log. Update it by hand on a notebook, use a 1099 excel spreadsheet program or a mileage-tracking app. What’s important is to update your records regularly to make sure they are precise. Also, you should keep your records for a period of three years from the date on which you file your tax return.
If you need help keeping track of your business expenses, Bonsai Tax offers a wide variety of tools to help make tax season easier on you. It is built exclusively for self-employed workers and designed to identify tax deductions, track your expenses and estimate your taxes.