How to: Increase your tax savings based on your odometer
If you use your vehicle to earn income, the Canada Revenue Agency (CRA) lets you claim your auto expenses as business tax deductions based on your mileage. To ensure you claim the correct amount, you need to track the number of kilometres you drive for both personal and business purposes. You may need to provide these records to the CRA in the case of an audit. Ideally, you should use a mileage logbook or mileage tracker app (we’ll give you some great options at the end of this article - so make sure to check those out).
Keep reading to learn what auto expenses you can claim, and how to properly claim them, as well as how to use your phone to automatically track your miles—as you’re driving!
WHO can claim auto expenses
You can claim eligible auto expenses if you’re self-employed, meaning this deduction is available to freelancers, independent contractors, and owners of unincorporated businesses alike! You can also claim it if you’re a partner in a partnership. In that case, you need to declare these expenses on Line 9943 (other amounts deductible from your share of net partnership income) in Part 6 of Form T2125 (Statement of Business and Professional Income).
Anyone who runs their own small business or even some employed individuals can also claim mileage. To claim mileage as an employee, you need to regularly work away from your employer’s primary place of business. For instance, if you’re a travelling salesperson or news reporter, you may be able to claim mileage expenses. Additionally, to be eligible for this deduction, your employer must require you to cover your motor vehicle expenses.
To verify that, your employer needs to complete and sign Form T2200 (Declaration of Conditions of Employment).
Anyone who uses their vehicle for business should keep a mileage log. Without a mileage log, you can’t claim this valuable deduction. (More on this below!)
WHAT are deductible auto expenses
Question: What are vehicle expenses?
Here’s the easy answer:
gas and oil
tires
general maintenance and repairs on the vehicle
registration fees and taxes
licenses
vehicle loan interest
insurance
rental or lease agreements
depreciation
large rental
tolls and parking fees
Now the nitty gritty: you can only claim the portions of these expenses that are for BUSINESS use.
WHEN to claim auto expenses
When it comes to auto expense for business, the CRA allows you to deduct only a portion of your total expenditures from the list above as part of your business expenses. So, like many other business expenses, there are some rules to consider when trying to figure out when it is considered deductible:
While the CRA considers driving from your home to your office personal use, you are allowed to claim mileage for trips to conventions, going to meet clients, or travelling anywhere else for business purposes.
Here are some examples of when the CRA considers mileage to be for business purpose:
Trips between offices
Meetings, visits, and meals with clients
Business-related entertainment
Trips for business travel
Running errands for your business
Driving to town to buy office supplies
WHY keep a Mileage Log
As mentioned above, it is necessary to keep a record of your milage in order to determine the auto expenses you can claim. A mileage log is a record of all your travel for business purposes. Every trip you make for business should have an entry which includes the date you travelled, purpose of the journey, destination, and distance covered.
Yes — even if it was just to the store to pick up pencils!
You should also note your odometer reading at the beginning and end of the year. Once you have your total mileage for the year and a logbook detailing your business trips, you would use it to calculate which percentage of your vehicle use was for work.
For example, say the odometer reading was 10,000 kilometres at the beginning of the year and 30,000 kilometres at the end of the year. You drove 20,000 kilometres total. When you add up all the kilometres noted in your logbook, you discover you drove 8,000 kilometres for business. To find the percentage of the time you used your vehicle for your business, divide the business mileage by the total mileage. In this situation, that’s 8,000 divided by 20,000, so you used your vehicle 40% of the time for business.
As a result, you can write off 40% of your eligible vehicle expenses as business expenses.
HOW to Keep a Mileage Log
Whether you own a small business or are self-employed, you can keep a logbook by jotting down all the relevant information in a paper notebook or saving it in a word processing file… BUT let’s be honest, who really has time for keeping a manual mileage log? It is much easier and more efficient (even more accurate) to use a mileage tracker app and streamline the record-keeping process.
Remember, the CRA requires you to keep all business records for at least six years, and that rule also applies to logbooks or data from a mileage tracker app. If you get audited, those details can be essential!
The documentation needed to track mileage includes:
Your business, commuting, and personal miles
The business purpose related to the deductible (business related) drive
The mileage (number of kilometres) for each deductible trip
Dates of your deductible drives, the start location and the destination
To make mileage logging easier for small business owners, the CRA also offers a simplified system. With this system, you must track every single kilometre you drive for work during the first year you use the vehicle for business. That’s considered your base year. You also need to be able to show the percentage you drove the vehicle for business in every quarter of the first year.
In the second year, you need to track your miles for a three-month sample period. To make the process as easy as possible, consider doing this during the first three months of the tax year. During this period, track your total mileage as well as the driving you do for your business. Then, calculate the percentage of the time you used your vehicle for work, and compare that number to the percentage of time you used the vehicle for work during the base year.
If you qualify to use the simplified system, you only have to keep a detailed logbook for the sample quarter as explained above. Then, you just multiply all your allowable vehicle expenses by the simplified percentage. For instance, if you’re using 45% as your simplified percentage, you multiply your expenses by 45%.
There’s a solution: Mileage Tracker App!
Keeping records of your business travel—consistent, accurate, and tidy ones, at that—is often a hassle. The admin work adds up quickly when you have to leaf through logbooks, gas receipts, toll booth slips, and credit card statements.
Luckily, a host of car mileage tracker apps use GPS tracking to make it easy to keep tabs on your small business travels—and keep CRA-compliant reports. Some free mileage trackers let you take a limited number of trips before you have to break out the credit card to cover a premium package. Other mileage apps lack a free version but offer a wealth of entry-level features that will make your mileage record-keeping quick and painless.
Here are the 4 best mileage tracker apps for businesses in 2022:
1. QuickBooks
Basic version: “Self-employed” $15/month
Full version: “Easy-Start” starts at $22/month
Features:
Track mileage automatically with your phone GPS and categorize trips with a swipe.
Multiple ways to track expenses: easily snap pictures of receipts and upload them to the cloud or sync with your bank or credit card for automatic expense tracking.
The self-employed mileage tracking app will also help you track additional transportation business expenses, such as Uber and Lyft trips or plane tickets
Unlimited, automatic mileage tracking: As many trips as you can make per month, tracked automatically via GPS.
Drawbacks:
No free version
Best for:
QuickBooks milage tracker is the clear choice if you use QuickBooks Online for your accounting software. It will integrate directly with your auto expenses in the app, and you can keep your records together all in one place. For those who don’t use QuickBooks already, it is also a solid choice as you can scan your gas receipts directly on the app, no need for holding onto paper copies!
2. MileIQ
Free version: Up to 40 trips per month
Full version: $5.99/month, or $59.99/year (paid annually)
Features:
Automatic mileage tracking: Once you flag certain routes, MileIQ will automatically detect them when you drive, classifying them as expenses.
Work hours: You can set work hours to determine MileIQ’s automatic mileage tracking.
Integration with Freshbooks and Excel: If you use either of these apps to manage your expense tracking, MileIQ can export CRA-compliant reports to them.
Drawbacks:
Only tracks miles: MileIQ doesn’t offer any accounting tools, like expense calculation. It just tracks how far you drive and lets you classify the trip.
Best for:
MileIQ is a solid choice if you drive for your business, but not for a ridesharing job. It’s also helpful if you have irregular hours since you can set work hours in the app.
3. Everlance
Free version: Up to 30 automatic trips per month, plus unlimited manual trips and receipts
Self-employed premium version: $60/year (paid annually), or $8/month (paid monthly)
Business version: Starts at $120/user/year (paid annually) or $12/user/month (paid monthly)
Features:
Automatic classification: Frequent places and trips are detected and automatically classified, and you can set rules for trip classification based on work hours and commutes.
Multiple ways to track expenses: Employees can snap pictures of receipts and upload them to the cloud or sync with their bank or credit card for automatic expense tracking.
Team reporting and analytics: As soon as a trip is classified as work-related, managers have access to trip details, including starting and ending locations, times, and complete route maps.
Drawbacks:
Limited free version: The free version only allows for 30 automatically tracked trips per month, though you can track additional trips manually.
Best for:
Whether you’re a rideshare driver, frequent business traveler, or managing a growing business, Everlance will probably work for you. The app is user-friendly and feature-rich, and if you don’t make many trips, the free version is likely enough to suit your needs.
4. TripLog
Free version: No automatic tracking, five vehicle limit, 40 trips per month
Full version: Premium plan is $4.99 a user/month or $60/year, team time tracking is $3.33/month. Enterprise pricing available by request.
Features:
Many ways to track mileage: Both manual and automatic, BlueTooth connection with vehicle, and compatibility with mileage tracking devices.
Photo capture for expenses: Employees can record receipts for expenses they incur on their trips.
Integrations: TripLog is partnered with several industry-leading tools such as QuickBooks, Xero, and others.
Drawbacks:
Free version doesn’t include automatic tracking: You have to enter mileage manually with TripLog’s free version. That more or less defeats the purpose of having a mileage tracking app—though new users can test out TripLog’s features with a 15-day free trial.
Best for:
TripLog is your best mileage tracking option if you have multiple employees with multiple vehicles who need to track their mileage. The free version lacks automatic tracking, though—so if you don’t have employees, but you’d like to test-drive a mileage tracker, TripLog may not be the best bet.
Staying on top of your deductions
As a small business owner, it can be difficult to know what deductions are relevant to you, and what rules apply to them — like keeping a mileage log!
Many people struggle to stay on top of their deductions year-round and instead try to piece things together at year end and run in to difficulties. Remember that restaurant expense you incurred in January last year? Most people don’t, and therefore they miss this tax write off. Add them all up and you’re missing out on a lot of potential tax savings!
That’s where Small-Books comes in
To claim these deductions, you’ll need to keep accurate records and stay on top of your monthly bookkeeping.
But bookkeeping can be a full-time job for many small business owners! If you don’t have the time to keep up with it all, check out Small-Books.
We record these deductions each month for you, so you can be confident you’re minimizing your tax liability. We’ll even file your taxes!
This post is to be used for informational purposes only and does not constitute legal, business, or tax advice. Each person should consult his or her own attorney, business advisor, or tax advisor with respect to matters referenced in this post. Small-Books assumes no liability for actions taken in reliance upon the information contained herein.
