Maximizing Your Business Automobile Expense Deduction

Why Every Small Business Owner Should Have a Home Office

By Mark S Gleason J.D., C.P.A.

This article will drag you through a maze of IRS guidelines that show you how you can deduct more of your miles as business miles than you may have previously thought. I’ve been helping my small business clients navigate these rules for years. Think of them as “guidelines[1]”. They’re a little fuzzy but if you can master them you can save yourself a lot of tax dollars. It could be enough to put your kid through college, so pay attention!

Legally saving money on your taxes is not easy, it takes both knowledge and discipline.  Few people have knowledge and fewer have discipline. This article is about knowledge. See also my article on Automobile Log Discipline for a more complete picture of what you need to do in order to implement these tax-saving techniques.

Walk through this with me and I will show you how you can increase (maybe double or quadruple) your automobile expense deduction. If you have a home office that meets the definition of “principal place of business”, you can make business miles out of most of what otherwise would be commuting miles.

IRS Publication 17 states:         

Office in the home.  If you have an office in your home that qualifies as a principal place of business, you can deduct your daily transportation costs between your home and another work location in the same trade or business. (See Chapter 28 for information on determining if your home office qualifies as a principal place of business.)

If you don’t have a home office that qualifies as your principal place of business, you should think about making one and using it every day for administrative and management activities.  By doing this I get to deduct most of my automobile use, because it is business mileage.

Having an office in your home doesn’t require the construction of an addition or even limited business use of a special room or significant area in your residence. According to IRS Publication 587:

To qualify to deduct expenses for business use of your home, you must use part of your home:

·        Exclusively and regularly as your principal place of business (defined later), [or]

·        Exclusively and regularly as a place where you meet or deal with patients, clients, or customers in the normal course of your trade of business.

Exclusive Use -

To qualify under the exclusive use text, you must use a specific area of your home only for your trade or business. The area used for business can be a room or other separately identifiable space. The space does not need to be marked off by a permanent partition.

You do not meet the requirements of the exclusive use test if you use the area in question both for business and for personal purposes.

Notice that there is no minimum size for the area that’s exclusively used for business.  It can be as small as a postage stamp and it can be inside a drawer, desk or filing cabinet. There is nothing that says you (personally) have to fit inside your little space. Your little business space has to meets the requirements for principal place of business. 

My little business space is the space I occupy in the chair in front of the desk and my computer monitor.  It includes my entire body, but more importantly my brain, my computer, my printer, my email, the internet, my website, my clients, my entire connection with cyberspace – the fastest growing part of the business world. All of the management and administrative tasks of my accounting practice, from billing my clients to paying my bills takes place in my little space, my principal place of business. I have an office in an office complex across town where I go to meet clients and sometimes work on the computer there, but my principal place of business is my home office, so the mileage between my home office and my other office is business mileage.

Here’s what the IRS Publication 587 has to say:

Principal Place of Business

         You can have more than one business location, including your home, for a single trade of business. To qualify to deduct the expenses for the business use of your home under the principal place of business test your home must be your principal place of business for that trade or business. To determine whether your home is your principal place of business, you must consider:

·  The relative importance of the activities performed at teach place where you conduct business, and

·  The amount of time spent at each place where you conduct business.

·  Your home office will qualify as your principal place of business if you meet the following requirements:

o       You use it exclusively and regularly for administrative or management activities of your trade or business

o       You have no other fixed location where you conduct substantial administrative or management activities of your trade or business

         If, after considering your business locations, your home cannot be identified as your principal place of business, you cannot deduct home office expenses.

The guidelines do not define what is meant by "administrative and management activities." I believe that the following would be considered administrative and management activities for most small business owners:

·        Paying bills

·        Reconciling bank statements

·        Payroll

·        Accounting

·        Meetings with your attorney, banker, CPA, or other vendors

·        Ordering supplies

·        Making copies

·        Filing

·        Maintaining your computer including software, network

·        Research

·        Business correspondence

·        Scheduling

·        Mail and email (opening, reading, sorting, filing, writing)

By performing these activities in your home office in your home office, the miles you drive from home to your other workplace become business miles (deductible), rather than (non-deductible) commuting miles.

Have a happy home office (principal place of business), drive safely and enjoy your tax savings!