The business use of a vehicle may be one of the biggest tax deductions you can take, pending on how much you use your car for work. Maximizing the deduction for the business use of your vehicle may help in reducing your taxes overall. If you are working from your home office, this would be in addition to those deductions.
There are many factors in what this could look like based on your company. Tax rules vary depending on the way the business chose to identify itself. A sole proprietor is different than a corporation, which may be different than an LLC. Consulting with a company like All About Businesses can help in providing you the information based on your specific situation. There are some rules which may apply to all, and other rules which may apply differently based on the business formation.
There may be a case for having a company car where the expenses of the car are paid directly by the company, including the car payment (lease or loan,) insurance, gas, car washes, and repairs and maintenance. We would advise speaking to a financial planner or a financial advisor. These companies are well equipped to look at your situation and talk about the pros and cons of your car being a company car compared to using your personal car for business and deducting the expenses this way. There are also rules on what can be considered a car for work and what vehicles qualify, so you want to understand these before you purchase a company car for the first time.
In the case where you use your personal vehicle for work purposes, there are two ways to deduct these expenses – standard mileage rate or actual costs. Which one you use may be which one gives you the overall better deduction. In both cases, you will need to keep track of your mileage, since the actual costs are based on the percentage driven for business vs driven for personal. The standard mileage rate for tax purposes changes from year to year. You can check the current year out here.
As a general rule of thumb, the more economical the vehicle is to operate, the likelihood of using this method would be better and give you the bigger deduction. The higher the cost of the vehicle, including gas, repairs, etc., the better using the actual cost will be.
Standard Mileage Rate
In using this method, and it is the simplest of the two, you will need to know how many miles you drove for the entire year. Notate the beginning mileage the first time you start using this vehicle for the year and then for the last time of the year. It is possible the last mileage for the year would be the first mileage for the next year, so you really only have to notate this once a year after the first complete year.
You then need to track miles which are used for business purposes. There are very specific rules on what constitutes business miles, so make sure you are not counting those which do not qualify.
Examples of business miles which do qualify:
- Visiting a customer
- Running work related errands, like driving to the bank or visiting the store for things needed for the office
- Meetings with professional services associated with the business like attorneys, accountants, etc.
Examples of miles not considered business related:
- Driving to and from your home
- Stopping somewhere on a business trip that is not business related
You may also be able to deduct interest on auto loans, registration and/or taxes, parking expenses, and tolls as long as you can prove they are part of a business expense. Keep good records.
If you are using this method, you still need to track your mileage as referenced above. You must know the total mileage and the mileage driven for business purposes. The same logic applies as to what does not considered to be business related.
In this method, you need to have documentation of all expenses paid throughout the year. These expenses include gas, maintenance and repairs, tires, insurance, parking, lease, rental payments, or interest on the loan of the vehicle. The calculation is easy, and any tax preparer knows how to do this. At a high level, if you use your vehicle 50% of the time for work based on mileage driven, then 50% of the expenses can be deducted and use as a tax write off.
The Standard Mileage Rate already includes an amount for depreciation, so this can only be used in the case where the Actual Cost method is used. This is an amount of value lost of the car as the car itself loses value over time. The tax rules are changing on this, as a bonus depreciation was added to tax laws and has changed in time. This may allow one to deduct a bit more in depreciation when the vehicle is first put into service. The actual calculations should be done by a tax professional, and we may be able to answer these questions for you.
Know Which Method the First Year
Once you use the Actual Cost method you can’t switch in later years to Standard Mileage Rate. If it is a different vehicle put in use, then this would not apply. If you start with the Standard Mileage Rate you can switch in later years to the Actual Cost method, which may make sense as expenses go up. Each situation is different so it is important to have an idea ahead of time what the best method may be. If you aren’t sure, keep detailed records for both methods the first year so your tax preparer can check and see which is better for you.
A vehicle used for work purposes can have the cost driven for work as a deduction against your taxes, which saves you on the taxes you pay. Keeping good records and understanding which method is best for you will help you maximize your savings. We can help with the calculations and we are up to date on current laws for vehicle deductions. Contact us today to learn more!