Deducting Mileage Before You Start Your Business
If you have an existing business, you can take a mileage deduction for the driving you do for the business as a business operating expense. However, you must actually be running a business to qualify for this deduction. If you’re in the process of starting a new business, any driving you do before it starts is not deductible as an operating expense. However, this does not mean it can’t be deducted. The driving you do to get a new business up and running can be deductible as a business start-up expense.
Business start-up expenses include:
- travel expenses related to finding a suitable business location
- the cost of investigating what it will take to create a successful business, including research on potential markets, products, labor supply, and transportation facilities
- advertising costs, including advertising for your business opening
- costs for employee training before the business opens
- expenses related to obtaining financing, suppliers, customers, or distributors
- licenses, permits, and other fees
- fees paid to lawyers, accountants, consultants, and others for professional services, and
- operating expenses incurred before the business begins, such as rent, telephone, utilities, office supplies, and repairs.
The general rule is that you can’t deduct such start-up expenses until you sell or otherwise dispose of the business. However, a special tax rule allows you to deduct up to $5,000 in start-up expenses the first year you are in business, and then deduct the remainder, if any, in equal amounts over the next 15 years. (IRC § 195.)
Thus, be sure to keep track of your mileage when you drive to get a new business started. This includes trips to find an office; meet with potential customers, clients, or advistors; obtain supplies; and so forth. You can use either the standard mileage rate or the actual expense method to deduct your driving expenses. Just try to keep your total start-up expenses to no more than $5,000. Any amount over $5,000 will have to be deducted a little at a time over 15 years.
Once your business begins, your business-related driving will cease to be a start-up expense. Instead, it becomes a currently deductible businss operating expense, deductible in any amount. Thus, the date when your business begins for tax purposes marks an important turning point. A new business begins for tax purposes when it starts to function as a going concern and performs the activities for which it was organized. The IRS says that a venture becomes a going concern when it acquires all of the assets necessary to perform its intended functions and puts those assets to work. In other words, your business begins when you start doing business, whether or not you are actually earning any money.
If your business involves providing a service to customers or clients— for example, accounting, consulting, financial planning, law, medicine, or dentistry—your business begins when you first offer your services to the public. No one has to hire you; you just have to be available for hire.
Because your business start date is so important for tax purposes, you should be able to prove to the IRS exactly when it began. There are many ways you can do this. Being able to show the IRS a copy of an advertisement or website for your business is a great way to prove you were open for business. You can also distribute promotional materials. You don’t have to advertise to show you are open for business—simply handing out business cards is sufficient. Give your first business cards to friends and associates who could testify for you if you’re audited by the IRS.