Part of the series: 10 Small Business Tax Mistakes (Based on IRS Guidance)
Some business expenses involve both personal and business use. When this occurs, only the business portion of the expense may qualify as a deduction.
IRS Publication 463 and IRS Publication 587 explain that certain expenses must be allocated between personal and business use. This commonly applies to items such as vehicles, home offices, and other shared resources.
When expenses are not properly allocated, deductions may not accurately reflect the business portion of the cost.
Why This Happens
Many small business owners use the same assets for both personal and business purposes.
For example, a vehicle may be used for both personal errands and business travel, or a portion of a home may be used as a home office.
Without tracking how these assets are used, it can be difficult to determine the correct business portion of the expense.
IRS Requirements
IRS Publication 463 explains the rules for allocating vehicle and travel expenses when property is used for both business and personal purposes.
IRS Publication 587 provides guidance on determining the business use of a home when claiming a home office deduction.
Both publications explain that only the portion of an expense related to business activity may be deducted.
Why This Creates Problems
- Overstated deductions
If the full cost of a mixed-use expense is deducted, the deduction may exceed the allowable business portion.
- Unclear records
Without tracking business usage, it may be difficult to verify how expenses were allocated.
- Inaccurate financial reporting
Improper allocation can affect both tax reporting and financial records.
Best Practices
Tracking business use of shared assets helps ensure expenses are allocated correctly.
Maintaining records that show how and when an asset is used for business purposes can support accurate calculations.
For example, mileage logs for vehicles or clear records of workspace measurements for home offices can help document business usage.
Steps to Take
- Track business vehicle use with a mileage log.
- Document how shared assets are used for business purposes.
- Maintain records that support the percentage of business use.
- Review IRS guidance when allocating mixed-use expenses.
Continue the Series
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