How to Deduct Vehicle Expenses for Small Business Owners
Vehicle expenses are one of the largest expenses for businesses who own vehicles and one of the biggest deductions you can claim on your taxes as a small business owner. This article will give you all the actionable information you need, summarized from the book, Tax Savvy for Small Business by Frederick and Quinn. Follow these steps to deduct vehicle expenses from your small business taxes.
Step 1: Keep a mileage log to record vehicle use. You’ll need this data when you prepare your tax return and in case you get audited.
Step 2: Allocate business vs personal use. The log will help you do this. If you only have one vehicle for yourself and the business, then do not claim over 80% business use. The IRS auditor simply won’t believe it. If you have a home office, then your mileage from home office to commercial office counts. If you don’t have a home office then the first drive you take away from home every morning does not count.
Step 3: Choose a deduction method. There are two different ways you can do it: Standard Mileage Method and Actual Expense Method.
The Standard Mileage Method:
This is the simplest method. It can be used whether your vehicle is owned or leased. This may be the better option if you drive a “gas miser or a faithful old clunker”. Follow these steps to use the mileage method:
- Add up the number of business miles you drove at the end of the year (you’re not supposed to use an estimate, but a lot of people do).
- Enter the total business miles number on your tax return.
- Multiply the total number of business miles by the IRS standard mileage rate in effect for that period of time.
- Add the cost of parking, tolls, and state vehicle taxes.
Situations where you cannot use the mileage method:
- You used more than one vehicle in one business simultaneously.
- You used the actual expense method for the same vehicle in previous years and also claimed accelerated depreciation method to deduct the cost of the vehicle
- You used section 179 to write off all or part of the vehicle’s purchase price.
The Actual Expense Method:
This requires more record keeping, but it’s usually worth it. For most newer vehicles, this method provides a bigger deduction than the mileage method. Follow these steps to use the actual expense method:
- Record all vehicle out-of-pocket operating expenses (gas, insurance, garage rent, lease payments, licenses, maintenance, repairs, parking and tolls, and tires)
- Add the annual depreciation deduction.
- Total the numbers in Items 1 and 2. If the vehicle is used 100% for business, you’re done.
- If you use your vehicle for some personal use, calculate the percentage of business use and multiply that percentage by the amount in Item 3.
The depreciation deduction is explained in Chapter 3 of the book. The IRS publishes tables to show the maximum dollar amount you can deduct for vehicle depreciation each year, based on variables like whether you bought new or used and how much you paid for it.
If you have a home office, all trips from home to a job site or client are fully deductible. If you do not have a home office, then all trips to get to and from work are considered commuting costs, which is not deductible. Home offices are described more in Chapter 14 of the book.
As you can see from this summary, the source for this article has very actionable, step-by-step instructions for keeping the proper records and maximizing business tax deductions. It’s one of the best commercially published books on the market today for tax deductions and it’s part of the NOLO series which has a reputation for being thorough and understandable for most topics related to law and business. Buy a copy for you and your business and save exponentially more than the cost of the book in business tax deductions.