Taxes Made Simple

While important for every business owner, this topic is particularly valuable for sales professionals in independent contractor roles (unless you’ve devised a brilliant plan to get your prospects to come to you instead of the other way around).

Commute vs. Transportation

The first thing to discuss when speaking about the deductibility of local travel expenses is the issue of commuting. Having your travel treated as “commuting” is much like having your business treated as a “hobby.” It’s bad news because you lose your deduction. Any trip between a person’s home and her main place of work is ruled to be commuting, and is entirely nondeductible.
Local trips that you can deduct, however, include:
1) trips from one workplace to another,
2) trips to visit clients, and
3) trips from your home to a temporary work location.

A temporary work location is any work location where you expect to be working for less than one year. [Note: If you do end up working at the location for greater than one year, even if you had reason to believe that you would not, your deduction will be disallowed.]

One important fact to know is that if you have an office in your home that qualifies as your principal place of business (see Chapter 13), you can deduct your costs of transportation from that office to another workplace. Thus, by restructuring things a little so you qualify for the home office deduction (more on this later), you may likely be able to change what would otherwise be a nondeductible commute into deductible business transportation.

Actual Car Expenses vs. Standard Mileage Rate

If you use a car (or other vehicle you own) for your local business transportation, you have two options for determining the size of your deduction:
1) Your actual car expenses
2) The standard mileage rate.

If you choose to use the first method, you can deduct the price of gas, oil, repairs, depreciation, and any other ordinary and necessary expenses for operating your car. Depending upon your situation (such as what type of car you drive, how old it is, if you drive primarily on the highway or on busy streets), this deduction could quite possibly be larger than the other option. The downside is that to deduct your actual expenses, you’ll need to do far more recordkeeping than if you opt for the standard mileage rate. Rather than simply keeping a log of how many miles you drive for business, you’ll be required to keep gas receipts, receipts for oil changes, receipts for repairs/maintenance, etc.

The standard mileage rate method of calculating your deduction is quite simple. All you have to do is multiply the number of miles you drive for local business transportation by the current year’s given amount. (The amount for 2007 is 48.5 cents per mile.) As such, all you will have to keep track of is the number of business-related miles you drive.

One important note is that if you ever want to use the standard mileage rate for your car, you must use it in the first year that you use that car for your business. If you use the standard mileage rate in the first year, you then have the option to continue to use it, or to switch to the actual expense method in any year that you want to. If you use the actual expense method in the first year, you’re going to be stuck using that method for the entire time you use the vehicle.

Using Public Transportation

If you use public transportation rather than your own vehicle to do your local business traveling, you only have one option for calculating your deduction. The good news is that it’s pretty straightforward. After determining which of your trips are deductible (see above) you simply add up the costs of each of those trips. It doesn’t matter whether you took a train, a bus, a taxi, or any other public transportation method.

In Summary

• The cost of commuting between your home and regular place of work is nondeductible.

• Local trips to visit clients, trips from one workplace to another, and trips from your home to a temporary work location are deductible.

• You can deduct either the actual costs of operating the vehicle, or the standard mileage rate. If you plan to deduct actual costs, you will need to keep records of all of those costs, the same way you would for any other business expenses.

• If you ever plan to use the standard mileage rate for a vehicle, be sure to use it for the first year in which you use that vehicle for business. After that, you’ll be allowed to switch back and forth as you please.

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