Claiming Car Expenses
Here's a transcript of my podcast, "Claiming Car Expenses."
Welcome! You’re listening to Tom Copeland’s Taking Care of Business. I’m Tom Copeland, and I’ve been a trainer, author and advocate for the business of child care for over 30 years.
This show is about the business side of child care and is for family child care providers and those who work in child care centers. I may not know much about caring for children, but I do know a lot about making your business more successful!
Today I’m going to talk about claiming car expenses in your business. First I’ll explain the rules for family child care providers and then talk about workers in child care centers. Car expenses are often a subject of IRS audits, so it’s important to make sure you are keeping the proper records to support your business deduction.
If you are a family child care provider you can claim car expenses if you take trips in which the primary purpose of a trip is business. That means that more than 50% of the reason for taking the trip must be for your business, before you can count it as a business trip.
Here are some examples of business trips:
Trips you take with your daycare children
Trips to the bank to deposit your parent checks
Trips to the library to get children’s books
Trips to training workshops, and so on
What about a trip to a grocery store where you buy both business and personal food?
If you spend more money on business food, count it as a business trip. It’s possible that you might always be spending more money on business food each time to go to the grocery store. If that’s the case, don’t claim 100% of all trips. The IRS will want you to show some personal trips to destinations that are for both business and personal reasons. Claim 60, 70 or 80% of your trips, but never 100%.
Sometimes in my workshops a provider will ask me if she can claim half the mileage for a trip that is for both business and personal purposes. The answer is no. You either claim all of the miles or none of them. If you only claimed half the trip that means you never came home!
Next, you need to keep an adequate record of your business trips. Your records can be variety of things: a receipt, cancelled check or notation you make on your check register, monthly credit/debit card statement, photograph, entry into a record keeping software program such as Minute Menu Kids Pro, entry on a calendar, or a written note that you make at the time you purchased the item at a garage sale. For example, if you marked on your calendar “library” “school” “field trip to park” that’s all that’s necessary to have an adequate record. You don’t need to keep odometer readings for each trip. You just need to know how many miles each trip is. You can look up mileage distances on Mapquest or other online websites.
There are two ways to claim car expenses. Use the standard mileage rate or claim a portion of the actual costs of your car expenses. The standard mileage rate for 2021 is $.56 per mile. So, for every 100 miles you drove in 2021 you can deduct $56.00 on your business tax form. In addition, you can also claim any expenses for parking or tolls for your business trips.
Finally, you can claim a portion of your car loan interest and car property tax. The car property tax is the tax you may have to pay each year as part of your car registration fee. Not all states charge car property tax. The business portion of your car loan interest and property tax is based on the number of business miles you drove divided by the total number of miles you drove. So, if you drove 2,000 business miles and a total of 10,000 miles, your business portion is 20% and you can deduct 20% of your car loan interest and property tax.
How do you know how many miles you drove your car for the year? You must record the odometer reading at the beginning and ending of each year. If you use more than one car in a year, record these odometer readings for both cars.
Many tax preparers miss claiming car loan interest and property tax, so be sure you are deducting this when using the standard mileage rate for your car expenses. I remember one time when I was helping a provider who was being audited and the auditor said she couldn’t claim car loan interest. I said yes she can. She said no she can’t. I said look at IRS Publication 463 where it says she can. The auditor said she didn’t have that publication in her office, so I sent her a copy. The next time we met she said, “Well, if you want to claim car loan interest you can.” I told her we wanted this deduction. Sometimes the IRS doesn’t know it’s own rules.
The second way to claim car expenses is by using the actual expenses method. Add up all the actual expenses of operating your vehicle: gas, repairs, car insurance, car loan interest and property tax, parking, ice scraper, new tires, and so on. You can also depreciate the value of your car. You must keep receipts for all of these expenses. The amount of these expenses you can deduct is based on the percentage of your miles that are business, or 20% in my previous example.
Which method is better? The standard mileage rate or the actual expenses method? Most child care providers use the standard mileage rate because it’s easier to keep records, but probably most providers would be better off using the actual expenses method.
Now let me say a few words about claiming car expenses if you work for a child care center. You might use your car for business purposes if you do errands in the middle of the day or transport children to a field trip. If your center has a policy that reimburses you for these trips, the money you get is not taxable income to you. The center can deduct the reimbursement as a business expense. If your center does not reimburse you for these trips, you can only claim them as a miscellaneous itemized deduction on the IRS Schedule A. Because you must have a lot of miscellaneous expenses before they are deductible, most center staff would not be able to claim car expenses on their personal tax return.
Here’s an idea to consider if you work in a child care center and use your car for business purposes. Estimate how many miles you drive for the center in a year. Multiply it by the standard mileage rate of $.56 for 2021. Let’s say you drove 500 miles last year for the center. $.56 x 500 miles = $280.00. The next time you are scheduled to get a raise, ask the center director to use the first $280.00 of your raise to reimburse you for your trips and the rest can go towards raising your salary. The $280.00 you get as a mileage reimbursement is not taxable income to you and is not subject to payroll taxes for the center. This is a pretty neat way for both you and your center to reduce your taxes.
In conclusion - Keeping proper records about the trips you take in your car for your business can end up saving you a lot of money on your taxes. It may not be any fun to keep these records, but you will be financially rewarded for the time you do spend on it.
Tom Copeland - www.tomcopelandblog.com
