Use Your Vehicle for Business? This One Mistake Could Get You Audited

One of the benefits of being self-employed is getting to enjoy a host of different tax breaks. You may, for example, be eligible for a home office deduction if you work out of your home and have an area used solely for business purposes. You can also save money on your taxes by deducting expenses that include professional license fees, equipment, and office supplies, like pens and notepads.

But in the course of taking tax deductions, you'll need to be very careful if you want to avoid a tax audit. And there's one mistake that could propel you to the very top of the IRS's list.

Be careful when taking deductions for a vehicle

You may have a personal vehicle that you use for business purposes as well. Let's say you're a self-employed IT professional, and your work involves going to different businesses and setting up their networks and equipment.

It's conceivable that you're incurring mileage in the course of doing that work. So if you keep a mileage log, you may be able to deduct the cost of mileage on your taxes. The standard rate is $0.655 per mile for 2023, which is the tax return you're filing this year.

But deducting mileage isn't your only option for getting a tax break out of your vehicle. You could instead deduct your auto-related expenses. These may include:

• Lease payments
• Parking fees
• Auto insurance
• Registration fees

But here's where you need to be careful. One thing you don't want to do is deduct 100% of these costs, because chances are, you don't just use your vehicle for business purposes.

In the above example, you might spend a lot of time driving around to see clients. But you probably also spend a lot of time using your vehicle to run personal errands and get to social plans.

So if you were to claim 50% business use of your vehicle, that perhaps would not be unreasonable. But if you claim 100% business use of your vehicle, your chances of getting audited could rise. That's because it's pretty unlikely that you never use your car for non-business purposes.

You may be even more likely to get audited if you claim 100% business use of a vehicle but you also don't have another vehicle registered in your name. If you have a second vehicle, you may be able to get away with claiming 100% business use on your other one. But otherwise, you'll need to be really careful.

Rely on an accountant's advice

Whether you're claiming a vehicle-related deduction on your taxes or another tax break, it's important to consult a professional to make sure you aren't bending the rules or putting yourself at needless risk of an audit. An accountant will be able to tell you what percentage of your vehicle to deduct. They'll also be able to tell you which non-vehicle-related expenses are legitimate and which aren't.

Remember, some of your deductible expenses may not be as obvious as others. So what you pay in the form of an accountant's fee, you might more than recoup in the form of tax savings that a professional opens the door to.