If you are self-employed and use your automobile for business, keeping a mileage log might be the most profitable use of your time all year. I know that sounds outrageous, but it is often true. Many, if not most self-employed people find keeping track of the business use of their vehicle to be an annoyance and they just don’t do it. After all, the need for a mileage log only arises at tax time, so it isn’t on our mind all year.
How much is your time worth? Most of us think our time is too valuable to spend recording our business mileage in a log book every time we get in the car for business purposes. But I’m going to convince you otherwise.
First I’m going to make some assumptions. I’ll assume that as a self-employed person you file your taxes on a Schedule C as a sole proprietor, thereby subjecting your business income to the self-employment tax at 15.3%. Next I’ll assume you are in the 25% marginal tax bracket. That is, for each additional dollar you earn you pay 25 cents in federal income tax.
For purposes of this example, I’m going to assume that you drive about 8,000 miles per year for business purposes. That means driving to clients, to vendors,to the office supply store, to the post office, etc. The standard deduction allowed by the IRS for business use of your automobile has been hovering around 50 cents per mile in recent years. As I write this, the allowable deduction is 55 cents per mile. For 8,000 miles, that gives you a deduction of $4,400 against your business income. Since you are paying tax at a rate of 40.3% (15.3% self-employment tax + 25% federal income tax), that $4,400 deduction will reduce your tax bill by $1,773!
I keep a spiral bound notebook on my car seat at all times. Every time I get into my car to conduct business I write down the date, the beginning mileage, my destination, and my purpose. It takes less than one minute. When I return home, I record the ending mileage. At the end of the year, I enter all amounts in a computer spreadsheet and calculate my total mileage. Then I enter the business mileage in my tax software and smile as I see my tax bill go down dramatically.
But is it worth the bother? Let’s say, based on my experience, that the average person will spend about 8 minutes per week keeping a mileage log. That works out to 7 hours per year. Add on another hour to enter the amounts in a spreadsheet at year end. That’s 8 hours of work to save $1,773. That works out to $221.63 per hour. Do you normally earn over $200 per hour? Probably not. As you can see, it is well worth your time to keep a mileage log. If you are in a lower tax bracket or if you drive fewer miles, you can perform the calculation yourself to see if it’s worth your time.
For those who simply estimate the amount they use their auto for business each year, be aware that the IRS has strict substantiation requirements for auto mileage. They do not accept estimates. You must have a written log that is “contemporaneous.” That is, it is recorded on or near the day of business travel. That means you can’t re-create a mileage log six months after the fact.
If you are one of those hard-working self-employed people who has always been too busy to be bothered with a mileage log, I hope you’ll reconsider. It could be the most profitable work you’ll do all year.
D. McRee is a freelance writer who enjoys publishing articles and web sites about his favorite topics. He frequently writes about the best Florida beaches, technical business topics, and self-improvement. Several years ago he discovered the benefits of Kava Kava Tea and has published a web site about this amazing herb