I own a vehicle and use it sometimes for work. What are the tax deduction rules around vehicles?

If you use your car for your small business, it can be a vehicle for significant tax savings. However, to get the most mileage out of the deductions you take for your vehicle and to avoid any IRS roadblocks, you need to know the rules of the road. This includes understanding how to calculate the costs of your business use and, as importantly, keeping accurate and complete records of that use in case the IRS decides to take a look under the hood.

With those clunky driving metaphors out of the way, its time for the rubber to meet the road. The basics of business vehicle deductions are straightforward.

Here are a couple important guidelines

• If you use your vehicle for business exclusively, you can deduct the entire cost of operating that vehicle from your taxes (with some limits).
• If you use your vehicle for both personal and business purposes, you can deduct only the costs of operating the vehicle incurred while doing business.

There are two primary ways to calculate the cost of business use of your vehicle for tax purposes: the standard mileage rate method and the actual expense method.

Standard Mileage Rate Method

This method involves a simple calculation:

Number of miles driven for business purposes x standard mileage rate

For 2018, the standard mileage rate is 54.5 cents per mile, up one cent from 2017. To use the standard mileage rate, you must own or lease the car and:

• You must not operate five or more cars at the same time, as in a fleet operation,
• You must not have claimed a depreciation deduction for the car using any method other than straight-line,
• You must not have claimed a Section 179 deduction on the car,
• You must not have claimed the special depreciation allowance on the car,
• You must not have claimed actual expenses after 1997 for a car you lease, and
• You can’t be a rural mail carrier who received a “qualified reimbursement.”

If you use this method, you can also deduct tolls and parking fees attributable to your business use, but you can’t include any parking costs incurred at your place of business. Additionally and importantly, you cannot include commuting as part of your business use mileage. However, if you use your car to go from business location to business location (e.g., driving from your office to see a customer or client at their office), those miles can be deducted.

Actual Expense Method

Using this method, you tally up the actual costs you incurred operating the vehicle and can deduct the percentage of those costs attributable to business use. Actual expenses include things like:

• License plates
• Gas and oil
• Tolls
• Insurance
• Garage rent
• Depreciation
• Parking fees (not incl. parking at your place of business)
• Registration fees
• Washing and polishing
• Repairs
• Tires

If your car mixes business and personal, you will need to figure out the business percentage of use and then deduct that percentage from the total expenses incurred.

Which Method Should You Use?

Do you drive a lot for business or just from time to time? Is your car low-maintenance and reliable or is it a clunker that you need to take to the shop every other month to keep it running? Those are the fundamental questions to ask when deciding which method to use.

If you put in a lot of miles for work and your maintenance expenses are low, you’ll likely get the most savings using mileage. Conversely, if the costs of operating your vehicle are significant, that may tip the scales in favor of actual expenses.

Keeping Good Records

Like a state trooper waiting around the bend for speeding drivers, the IRS keeps a close eye on filers who deduct vehicle expenses. If they decide to look at your claimed deductions, you better have clear and complete mileage, toll, maintenance, and other records ready to prove your business use.

If you use the actual expense method, you can buy a vehicle expense log book at an office supply store to help you keep track of your costs. If you use actual mileage, we recommend the MileIQ app. It automatically keeps a record of your mileage, and you simply swipe right before heading on a business drive or swipe left before driving for personal use. The app then puts together reports reflecting and allocating your mileage.

Of course, depreciation on your business vehicle also can play a big role in lowering your tax liability, as we will discuss in a future post. If you have questions about the tax treatment of your vehicle, please contact us. We welcome the opportunity to assist you.