Are you taking advantage of all the tax breaks available to your business? If you've rented a vehicle this year, whether it was for chauffeuring clients or hauling materials from one location to another, you may be able to deduct those expenses on your income taxes. Claiming this deduction can increase your return amount or cut down on the amount you'll owe next tax season.
Here is everything you need to know about writing off car rentals for your small business.
Use the Rental Vehicle for Business Purposes
You can write off 100% of the expense if you rent the vehicle specifically for business purposes, which includes travel as part of your daily business activities. If you use the rental for personal reasons, you may only deduct the portions related specifically to a business activity. You cannot make these deductions if a client or employer reimburses your costs.
Have a Legitimate Reason
To file for the deduction, the travel expense must be typical for your business. An ordinary expense is one that is relatively common for your trade or industry. A necessary expense is one that is highly appropriate and beneficial to your business. This means that you shouldn't try to write off that trip to Vegas if you don't have an obvious business reason for it.
Determine the Location of Your Tax Home
Your tax home is the general geographical location in which you conduct business. If you have multiple places of business, including a home office, choose the location where you spend most of your time and conduct most of your business. Once you establish a tax home, you will need to file as a business owner or self-employed person and itemize each of your deductions.
Travel Away From Your Tax Home
Typically, in order to claim travel business deductions, you must be away from your standard working area (whether that is your home or another location) for longer than a normal workday; specifically, travel deductions typically require you to sleep or rest in order to complete your business-related duties. This does not mean that you have to be away from your tax home for a whole day or from dusk to dawn; however, your break from performing your business-related tasks must be long enough that you can sleep or rest. You cannot satisfy this requirement by napping in your car.
Deduct Other Car-Related Expenses
In most cases, you can deduct 100% of the fuel used during business activities, parking fees, tolls and rental insurance. Fines and tickets, including parking tickets, are not deductible.
Keep Solid Records
It's a good idea to create a travel log that documents the reason for the trip, what clients you were seeing or what job you were working on. Keep all your receipts for rental payments and fees, fuel, parking and tolls. When deducting business meals, write the names of attendees on the back of your receipt. Also, keep a mileage log that includes the date, odometer readings and mileage of each tax-deductible trip you take.
Organize Those Records
Put your relevant information in a simple Excel spreadsheet, and scan in your receipts to make it easy to organize your information. If the IRS comes calling, you will have all the details available at the push of a button. Note that the IRS doesn't have to accept reconstructed logs, so your best bet is to stay on top of it and take a few minutes to note the details shortly after a business trip.
Claim Your Deductions
If you plan to do a lot of travelling for business purposes, following these steps is a great way to save you quite a bit of money when tax season rolls around. It does not need to be a complicated process, but you do have to keep your receipts and a good record of all your expenses.