Every new business owner is so excited to be able to deduct car expenses when they open their business. I know exactly what all the gurus on Tik Tok are telling you. But I have to give it to you straight. Beauty business owners usually have limited mileage they can deduct for tax purposes. It's not that you can't take a mileage deduction. That's not what I'm saying at all. What I am saying is that the deduction isn't as large as most beauty professionals are hoping. BUT in 2020 you may have done one particular thing differently that could change that! Read on to find out more. Today we’ll dig into whether Standard or Actual mileage is better for your situation, and how to easily track your mileage for a deduction.
What kind of miles are deductible for me?
Alrighty, first of all, in case there was any confusion: personal miles driven are not deductible. That much should be obvious, but to clarify, this means any driving you did, even in a company vehicle, that wasn’t considered salon work is not applicable for a deduction.
Another thing that’s not as obvious, but still very important to know: commuting from your home to the salon is considered personal mileage. The reason for this is simple: the IRS, the good guys that they are, want to keep an even playing field, and other types of employees don’t get to deduct travel from home to office, so neither do you.
These two facts mean the inevitable for the average beauty business owner: the only miles you can deduct will be for things like business meetings or travel for educational purposes, or to run work errands.
However, there is one bright spot for beauty businesses in 2020, which previously may have been just a blip on their Tax Radar (our favorite type of radar, of course) in previous years. House calls to clients' homes are deductible miles. So if 2020 had you bustling around the neighborhood making your friends and family look glam for their Zoom calls, you can use those miles in your deduction!
Let’s dig in further to the two types of deductible miles so you have a better idea of which applies to your work situation.
Every year, the IRS determines the rate at which you’ll calculate your standard mileage deduction. For your 2020 taxes, you multiply the miles used for business purposes by 57.5 cents.
If you’ve used the Standard Mileage Deduction every previous year with your current vehicle, continue to use it.
If you’ve recently leased a vehicle, and you want to deduct the actual lease payments, use the Actual method (discussed below).
However, if you have previously calculated Actual Mileage on your current vehicle, claimed accelerated depreciation, or a Section 179 deduction on your current vehicle, you cannot use Standard Mileage deduction (see Actual Mileage section below for more details on your situation.)
The Actual Mileage deduction will apply to you if you have a fleet of four or more company vehicles used for daily business activities, or if you’ve recently leased a vehicle and do not plan to calculate Standard Mileage for the entirety of your lease. Again, you can calculate your lease payment into your deduction using this method.
If you’ve claimed accelerated depreciation or a Section 179 on your current vehicle, you will use Actual Mileage to calculate your deduction.
The bottom line is that if you have used the Actual Mileage deduction at any point for your current vehicle, you will have to continue to use it in subsequent tax periods. You cannot switch to Standard Mileage after using Actual Mileage in the past. It’s the least fun type of commitment there is, besides getting a lemon Motorola on a 2-year plan. But you’re smarter than that, which is why you’re here sorting this out.
We’re gonna be honest with you: using the Actual Mileage deduction is a lot more work and most times doesn’t even give you a larger deduction. It involves adding up all money spent on operating the vehicle and multiplying that figure by the average percentage of time used for business purposes.
As an example, let’s say you spent $6200 on your vehicle in 2020, and you used it for 10% of your daily business activities for the year. You would multiply $6200 by 10% and there’s your deduction. If $620 is less of a deduction than you’ll get using the Standard method, you know which one to use (hint hint...for a beauty business owner, it’s almost always going to be the Standard method!)
Keep an updated mileage log
The IRS doesn’t mess around when it comes to false tax claims and deductions. You must keep an up-to-date and comprehensive mileage log of all business trips. The details to include are:
You must have a mileage log at all times, whether you use Standard or Actual Deductions for your taxes. You must keep this log for 3 years after your taxes are filed and claimed.
Here’s the part where I tell you how great QuickBooks is for everything, including mileage deduction. QuickBooks has a mobile app with a built-in mileage tracker, so your mileage log is essentially done for you (with a few details added on your part.) This information is then easily transferred to your program come tax time.
However, if you don’t have QuickBooks, MileIQ is another easy way to track your mileage.
If you haven't kept a mileage log throughout the year, you can recreate one by reviewing your expenses. If you notice trips to the beauty supply store, simply hop on Google maps and see how far the store is from your home. Bada bing. Bada boom. Mileage log created and tax deductions to the rescue.
We’re always here to answer your questions
We know tax season can be stressful, and there are a ton of moving parts, especially after years like the one we just had in 2020. If you want a helping hand, or you have any burning questions, we would love to help you. Give us a call, shoot us an email, or slide into our DMs.