Deducting Car Expenses for a Home Business

After reading yesterday's blog post about car expenses, a reader asked, "How do I know what car expenses I can deduct from my home business? What travel from home to other locations is deductible?"

Can I Deduct Car Expenses Going Back and Forth from my Home Office?
You can deduct business-related car expenses for travel back and forth under these circumstances:

• You work at home or from home and your home is your principal place of business (the place where you earn most of your income or where you do your administrative or management tasks)
• You don't commute back and forth from your home to an office.
• You can prove that the car expenses were business related, not personal.

Two Examples
Sunny works from home as a freelance writer. She has online clients, but she also has local clients. She can deduct any car travel to drop off or pick up work from local clients, and to travel to the office supply store for supplies.  She should be careful not to combine business trips with personal ones, like personal banking or a stop at the grocery store.

Karl works out of his home as a manufacturer's representative, and he travels around the state to meet clients and discuss purchases.  He does his administrative work at home, so it is his primary place of business. He keeps a log in his car and records mileage for all car travel, from his home to client locations, hotels, and back.

In both of these cases, the small business owners can deduct all business travel to and from their home.

How Do I Prove Car Expenses are Business Related?
The IRS looks very carefully at car expenses for small businesses.  They want to see detailed records that:

• Were prepared at the time of the expense (not weeks later) and
• That detail the date, reason for the trip, and include any other information to show that the trip was business-related

What Car Expenses Can I Deduct?
You can deduct all ordinary and necessary expenses related to business travel, but no personal travel. You can deduct these expenses for car travel to and from business locations.  For example:

1. the home of a client
2. the office store where you buy office supplies
3. temporary job sites where you work for clients
4. places where you meet with clients, customers, or business advisers
5. your warehouse or the place where you keep your business inventory
6. a convention center where you participated in a business seminar

How do I determine these car expenses?

• You can use the standard mileage deduction rate set by the IRS (55 cents a mile for 2009), or
• You can keep track of actual costs for all car-related expenses.

Using the standard mileage rate is less trouble, because all you have to do is set out the miles traveled for business purposes, but the actual cost method sometimes results in higher deduction amounts.

First-year Rule for Standard Mileage
If you don't use the standard mileage rate the first year of your business, you can never use it again.  If you do use standard mileage the first year, you can then select the rate which will give you the highest possible tax deduction.

Remember, although business travel to and from your home based business is deductible, it must be documented and recorded at the time of the trip.  Don't get caught shorthanded without these documents in the event of an IRS audit of your business.

For More Information:
More about Taxes for Home Based Businesses

Standard Mileage vs. Actual Expenses - Which is Better?