Driving for Dollars deductible?
I'm starting to track my mileage via the Mileage IQ app and wondering whether driving for dollars mileage is deductible. If so, does that make virtually all my mileage deductible? I can't remember the last time I drove anywhere that I wasn't scouting for properties, writing down addresses, etc... Where do you draw the line between just driving and driving for dollars as far as deductibility?
Hey Paul great question.
I'm with ya... I always look when driving too.
Here's what I've followed for tracking mileage:
If I am zig zagging through residential streets I count the mileage for a tax deduction. If I am going from point A to point B directly (especially if using an interstate...) then I don't deduct those miles.
Entrepreneur Magazine has a blog out there about the top ten questions you should ask when selecting an accountant. One question from the article is something like "Would you consider yourself a more aggressive or conservative account," suggesting to me there might be some personal choice on something like this.
I love the question.
What do you do?
PS - I've been using the Everlance app for tracking miles. It records all my trips in the background and I can reconcile them any time.
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I guess the answer will depend on how aggressive your CPA is... I wounder what other tax experts have to say about this...
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if it is as you describe then it seems as if your mileage would simply qualify as an ordinary and necessary expense of conducting your trade or business.
I'll assume you are not counting mileage for any personal affairs.
I just downloaded the app yesterday. My wife and I were headed out for dinner last night and I saw a for sale by owner sign. Stopped the truck and walked around the property, wrote down the phone number. Then the app asked me if the mileage was personal or business and I wasn't sure what to do.
Originally posted by @David Lecko:
Entrepreneur Magazine has a blog out there about the top ten questions you should ask when selecting an accountant. One question from the article is something like "Would you consider yourself a more aggressive or conservative account," suggesting to me there might be some personal choice on something like this.
Rules for deducting vehicle expenses.
The personal choice is in how often you want to lose at audit. Some tax professionals don't mind losing at audit. Others would rather eat directly out of a dumpster than lose at audit.
Investors should also be aware there is an unequal distribution of risk-reward when taking an aggressive position on a tax return. If the taxpayer claims mileage expenses that are subsequently disallowed the taxpayer has to pay the tax, some interest, and possibly a penalty. If the tax professional (me) helps a taxpayer claim mileage that is subsequently disallowed then the IRS has found a tax preparer that plays loose and fast with the rules. They aren't stupid. Suddenly a significant percentage of my clients are getting audited. That's not going to be great for my business - a higher risk than paying some tax and interest.
So, keep in mind, while it sounds cool to have an aggressive tax professional, s/he isn't being aggressive on only your return. S/he is likely being aggressive on everyone's return - making it more likely you will be proving your expenses to the IRS at some point. Keep good records!
@Paul Allen helpful. Are you able to recommend an easy to remember best practice for deducing our driving for dollars?
As usual, the answer is "it depends".
Are you already "in business" and ready, willing and able to buy your next investment? If you meet all four of those criteria, then you could make a really great case that driving for dollars (ie, intentionally going out to look for houses) would be deductible.
If you are not "in business" yes, then the mileage will likely be able to be added to the basis of the first property you acquire and then depreciated. You might be able to make a case to utilize it as Start Up Expenses, which are also amortized once you're actually in business.
If you are not ready, willing and able to acquire your next property, then all that driving is just wishful thinking.
When I go look at a specific property I log that address and mileage. Driving for dollars MAY be deductible but I would certainly be careful. If you legitimately claim 50 or 100 miles over the course of a month, the IRS may not be too pushy. If you start claiming HUGE amounts of mileage, who knows? The LEAST you should do is record your mileage, and if you find houses of interest, record those addresses.. That will help justify the expense. I don't care for "aggressive" tax guys...but I do want one that makes sure I receive what is legally mine to deduct. As to "aggressive" tax guys, there is only so much "play" unless they commit outright fraud. Watch out for THAT kind because you STILL owe taxes if your tax person is a crook:)...not to mention penalties and interest. Remember Wesley Snipes? He didn't fare so well:)....a few years in prison and the feds seized his multi-million dollar home in Florida. His CPA went to prison as well.
@Linda Weygant, thanks for the response. I closed on my first property in February and I'm about 30 days or so from being ready to move a tenant in. I am actively starting to seek out my next project.
Hi BP Gurus, just latching on to this topic, assuming an aggressive CPA, where does this miles deduction goes to on the tax form? I would assume since it is for a rental business, it would go under Schedule E, however, Schedule E expenses are pegged to properties...how do one expense such deduction that are not specifically related to a property?
Quote from @Han T.:
Hi BP Gurus, just latching on to this topic, assuming an aggressive CPA, where does this miles deduction goes to on the tax form? I would assume since it is for a rental business, it would go under Schedule E, however, Schedule E expenses are pegged to properties...how do one expense such deduction that are not specifically related to a property?
If it's related to rentalals it should have a scheduel E to connect to.
If it's costs for D4D that are going into finding your next property I'd likely add them onto the basis/purchase price of that next property.
Originally posted by @Natalie Kolodij:Quote from @Han T.:
Hi BP Gurus, just latching on to this topic, assuming an aggressive CPA, where does this miles deduction goes to on the tax form? I would assume since it is for a rental business, it would go under Schedule E, however, Schedule E expenses are pegged to properties...how do one expense such deduction that are not specifically related to a property?
If it's related to rentalals it should have a scheduel E to connect to.
If it's costs for D4D that are going into finding your next property I'd likely add them onto the basis/purchase price of that next property.
Hey @Natalie Kolodij, I see what you mean. Very well explained!
Just a further clarification, would it matter if my D4D was in one or a few state, in say, TX, but then eventually, I ended up buying a property in another, say OH. It was a legitimate D4D (added into the basis of the next pty in OH). Would that be a major red flag?
Quote from @Han T.:
Originally posted by @Natalie Kolodij:Quote from @Han T.:
Hi BP Gurus, just latching on to this topic, assuming an aggressive CPA, where does this miles deduction goes to on the tax form? I would assume since it is for a rental business, it would go under Schedule E, however, Schedule E expenses are pegged to properties...how do one expense such deduction that are not specifically related to a property?
If it's related to rentalals it should have a scheduel E to connect to.
If it's costs for D4D that are going into finding your next property I'd likely add them onto the basis/purchase price of that next property.
Hey @Natalie Kolodij, I see what you mean. Very well explained!
Just a further clarification, would it matter if my D4D was in one or a few state, in say, TX, but then eventually, I ended up buying a property in another, say OH. It was a legitimate D4D (added into the basis of the next pty in OH). Would that be a major red flag?
Typically each market is somewhat looked at as it's own individual "business" for tax purposes but it would depend on the specific situation