Question

Each year you prepare a tax return for your client, Sebastian. Sebastian started a new business in January of 2019 delivering groceries to elderly clients. He uses the family van they have personally owned for years to make the deliveries. The family also use the van for personal purposes because they all cannot fit into the Toyota Prius they also own. It is now March 13, 2020 and you are meeting with Sebastian to gather information to prepare his 2019 income tax return. You ask him to provide the amount of business miles driven in his van during 2019. You are planning to use the standard mileage method to calculate Sebastian’s deduction for transportation costs. Sebastian states “I don’t keep track of my miles”. He pauses to think, then says “I guess I drove about 4,000 miles in 2019”.

What would you say to Sebastian? Can you deduct the mileage as a business expense for 2019 on Sebatian’s income tax return? If yes, describe a legal method for Sebastian to document the miles. If no, describe why not. If no, explain to Sebastian what is required for 2020 to change the conclusion to yes. If yes, describe why.

Answer 1

No, we cannot deduct the mileage as a business expense for 2019 on Sebastian's income tax return. The reason for the same has been explained by first explaining the 2 methods for calculating the transportation deduction tax and then explaining why standard mileage cannot be used in the current scenario :

1. 2 Methods of calculating transportation tax deduction :

There are two ways you can deduct business-related mileage: actual expenses, or a standard mileage rate.

Actual Expenses Method

With the actual expenses method, you can deduct the actual cost of using your car for business, plus depreciation. This method requires more intensive record keeping, but may result in a larger deduction.

To use the actual expenses method, keep track of all of your car-related costs throughout the year, including: gas, oil, tires, insurance, registration fees, licenses, and depreciation. You’ll also need to track your total miles driven, separating out personal miles and business miles.

To calculate your deduction, multiply your total expenses by the percentage of business miles driven during the year.

Standard Mileage Rate Method

With the standard mileage rate method, your deduction is based off a pre-determined cents-per-mile rate for every business mile you drive. For 2017, the rate is 58 cents per mile.

If you choose this method, you’ll need to track your total miles driven, separating personal use from business use. With the standard mileage rate, you can’t deduct actual care expenses for your car such as maintenance fees or insurance. However, you can deduct any business-related parking fees and tolls.

To calculate your deduction, multiply your business miles by the standard mileage rate for the year.

2. Reason as to why standard mileage rate cannot be used in the current case :

As stated above, to be able to use the standard mileage rate method, the tax payer needs to keep a track of his miles including the distinction between business miles and personal miles.

However in the current scenario, Sebastian only has a rough idea regarding the total miles driven in 2019 and has not kept a track of the distinction between business and personal miles. Hence Sebastian cannot deduct the mileage as a business expense for 2019.

3. What is required for 2020 to change the conclusion :

For 2020, Sebastian should keep a concise track of his miles driven distinguishing them into business and personal miles to be able to deduct the mileage as a business expense.