Whether you are a small business or a large scale multinational, keeping track of your expenses is essential. Not only does it help you understand your balance sheet, but it is also useful in the tax season. However, tracking mileage is an arduous task.
And business mileage deductions are the most difficult to prove. Therefore, you have to keep legible records to cash in on the enlarged tax deduction. Indeed, the IRS often asks taxpayers to provide proof of their mileage with documentation. Therefore, you must capture all information about your mileage the right way to avoid fines.
What Is The Right Way To Keep Mileage Records?
The IRS wants taxpayers to give them a timely and accurate record of their mileage. To put it simply, you must tell them where you went, why you went, and how long it took you. The best way to do so is through time logs for business trips.
1. Let Employees Be Your Scribes:
Some companies give their employees pens and papers to log when they get in their vehicles. There are separate boxes for each detail of the trip, such as the date and the odometer readings. Moreover, some companies have cost codes and department information. But, this method takes a lot of time, and things can get confusing. Employees might even lose their records or damage them. Furthermore, it does not work for larger companies with fleets.
2. Do The Work Yourself:
You can keep a manual record of your travels yourself. Choose a day to collect information from drivers and employees. Time the collection before the end of the month so that you can reimburse employees accordingly. Keep a ledger to note down the name of the employee and their destination. Then take a picture of the odometer when they begin their journey and take one at the end. You also have to include the reason for traveling and prove it with supporting documents. Or you can also use the Mileage Tracker app for this purpose.
3. Digital Records:
Fortunately, you do not have to save ticket stubs or maintain large ledgers any more. Nowadays, you can keep digital records to save the hassle of collecting the paperwork. Indeed, tax authorities prefer computerized records because they are easy to read and manage. You can use a spreadsheet that is accessible across the board so everyone can add their information independently. Just like the paper records, allocate each section a separate column. Remember to keep things simple and add total mileage per week for each employee. You can use the spreadsheet to track how much you spend on traveling and set your budget accordingly.
But the self-reporting mileage system leaves a lot of room for error. Since accuracy is vital for effective mileage tracking, a single error can lose you thousands. Even Excel spreadsheets make a lot of mistakes because you rely on people for the data. And sometimes employees try to take shortcuts that end up costing you in the long run. Some might guess the miles traveled. Not only is this inaccurate, but it may even land employers in trouble with the authorities. And frankly, the time they spend logging mileage is better spent on other revenue-generating activities.
4. Google Maps Integrated System:
A spreadsheet integrated with Google Maps can determine the distance of the trip. Such records can provide more accurate data. But, there is still room for error. Most mapping tools measure displacement, not the distance. Since they estimate the shortest possible journey between locations, you will have to create customized routes for every trip. Fortunately, there is a way you can use GPS data to track real-life traveling.
5. Mileage Log Programs:
Some companies have accounting programs to handle everything. There are many different apps on the internet that can do the hard work for you. With a good-quality mileage tracker, you can even differentiate your business miles from personal traveling. Furthermore, you can say goodbye to spending hours auditing employee provided data. Unlike other options, you will not have to guess your mileage. The best mileage tracking apps deliver mileage data to employers so that employees do not exploit the system.
What Else Do You Need To Keep In Mind?
The IRS requires a mileage log that is up to date. According to their guidelines, companies have to track mileage within three months of the trip. Therefore, you cannot wait for the last moment to file your mileage log. The best practice is to log the mileage on the day that you take the trip. Since the employer is in charge of paying tax, they must be the custodian of the record.
What About Employee Privacy?
Privacy is a valid concern in this day and age. Nowadays, people are more aware of how vulnerable their data is to hackers. So, is it ethical to track mileage with GPS? And what do employees think of this? According to a survey by TSheets, 95% of employees are okay with employers using a GPS tracking system. But, employees must not use tracking systems as an excuse to micromanage employees.
What Are The Two Methods For Deducting Mileage Expenses?
There are two ways you can deduct costs. You can either use the actual expenses or the standard IRS mileage allowance. Both methods have their pros and cons.
- Actual Driving Expenses:
Since this method focuses on the actual expenses, you will need slips for everything. So save receipts for fuel, maintenance costs, and insurance premiums. You can also add other expenses like tools, garage rents, and parking fees. Then you must add all the costs and multiply them by the percentage of total miles traveled. Lastly, add them to your tax return. Needles to say, this is a lengthy and complicated procedure. Therefore, most employers prefer the IRS standard mileage allowance.
- The IRS Standard Mileage Allowance:
The IRS has a standard mileage rate for each year. It is the maximum per mile rate the IRS offers for a business to calculate their mileage. All you have to do is multiply this rate by the total mileage, and that is all. While this method is convenient, it is far less accurate than the actual driving expenses method.
Tracking mileage is necessary for taxation and to get an idea of the expenses. From paper mileage to the Microsoft excel system, there are many ways firms can track their mileage. But, manual systems waste valuable employee time. Therefore, a mobile mileage log is a necessity for the 21st century. Furthermore, since 2019, trucking companies must track their movement with an electronic logging device (ELD). Since most ELDs have in-built mileage tracking, companies can use them to save money and improve driver safety.