When you're a business owner, it's wise to take every tax deduction available. However, people often need help to utilize one tax write-off to its full potential: the business use of vehicles.
You can deduct vehicle expenses in various ways. Knowing your options will ensure you or your tax preparer have all the necessary documentation to get the most significant tax refund each year.
Use these auto deduction tips and tricks to garner the biggest tax deductions when you use your vehicle for business purposes. Whether you have a company fleet of trucks or drive your personal car when you travel for business, here are the deductibles a tax professional uses for auto expenses, along with record-keeping methods for easy filing when the tax year ends.
Determine Vehicle Use for Business Purposes
There are criteria the IRS requires a business owner or employee to meet before allowing tax deductions for vehicle use. Here are what you need to qualify:
- Being self-employed and using your vehicle for personal and business reasons
- Being a business owner that owns or leases vehicles for company use
- Being an employee that uses a personal vehicle for company tasks
The IRS allows cars, trucks, SUVs, motorcycles, RVs, delivery vehicles, and vans to use the "Auto" deduction when filing taxes.
Qualified Self-Employed Auto Expenses
If you're self-employed and use your car to perform business-related driving, you can deduct that portion from your tax return Schedule C as an auto business expense. However, you cannot deduct any driving expenses when using the vehicle for personal reasons.
Other expenses you can deduct all or a percentage of include:
- Maintenance - oil changes, new wiper blades, car wash, etc.
- Lease payments
- Car loan interest
- Vehicle registration fees
- Insurance premiums
- Actual fuel costs or standard mileage rate
Qualified Business Auto Expenses
If your business leases or owns a car or other vehicle(s) with the title in the company's name, you can deduct costs only using the actual expenses method. However, this is under the assumption the vehicle is only for company-related purposes.
Please note that the IRS considers driving a company car for personal reasons a taxable fringe benefit under the law. Therefore, tracking business vehicle mileage and any expense deduction is critical to avoid tax issues, especially if you often drive the company car to handle personal errands.
Qualified Employee Auto Expenses
The best tax advice for company employees that must use their personal vehicle to perform business-related tasks is to track all expenses, including:
- Daily work-related mileage
- Parking fees
Remember that taking an auto deduction on your taxes is not the same as business travel expenses, which include flights, taxis, meals, or lodging.
The biggest thing to remember when tracking mileage for work use of your car is that you cannot count any miles you normally commute to and from your place of employment.
Deducting Vehicle Depreciation on Taxes
A business can get a large tax deduction when claiming vehicle depreciation using the actual expense method. Depreciation expense is a way of deducting the cost of the vehicle over many years and helps businesses mitigate major swings in tax write-offs each year.
Vehicles depreciate or lose value according to several factors, but the IRS has guidelines for calculating the number on its website. Typically the most significant depreciation is taken in the first three years of ownership.
Small businesses gain from auto deduction tips and tricks, such as claiming depreciation, because the government now offers higher annual limits on depreciation. The Tax Cuts and Jobs Act also gives you an $8,000 bonus depreciation on both new and used vehicles purchased for business use if your company is profitable.
How to Choose Between Actual Expenses or Standard Mileage Rate
There are two methods to determine expenses for the IRS auto deduction. The first is actual expenses, which are the total receipts spent on fuel, repairs, maintenance, tolls, depreciation, and other allowable deductions for that year.
The second option is to add up all the miles you put on your car for business travel and multiply it by the current IRS standard mileage rate. While the old rate used to be 56 cents per mile, the rate for the first half of 2022 rose to 58.5 cents per mile. However, the rate for the second half of 2022, or any mileage after July 1, went up an additional four cents to 62.2 cents per mile to help offset higher fuel prices.
For medical or moving expenses (available for active-duty military members), the rate from January 1 through June 30, 2022, is 18 cents per mile, and from July 1 through December 31, 2022, the rate is 22 cents per mile. Charities can deduct 14 cents per mile for the entirety of 2022.
The standard mileage rate includes all "actual expenses," so you cannot use this rate for your deduction and add in fuel, maintenance, or other fees.
Most people find using the mileage method the easiest to compute and often results in a bigger deduction than actual car expenses if you drive many highway miles. However, there will be instances where major repairs or other issues will make the actual expense method a higher figure.
One way to get the most from choosing the standard mileage rate to calculate auto expense deductions is to keep your car in peak condition by taking your vehicle to expert technicians who provide affordable service.
Every year you must track actual expenses and mileage, tally the numbers and use the method that yields the highest amount so your tax deduction is as large as possible.
How to Track Auto Expenses
Keeping a daily log of mileage and expenses is one of the best auto deduction tips and tricks and is easy when you use a logbook or app tailored for business travel. While smartphone apps like TripLog, Hurdlr, or MileIQ are excellent for easy data entry of ordinary business travel expenses, it still pays to transfer expense information to a paper logbook in the event you lose or break your smartphone or laptop.
The Adams Vehicle Mileage And Expense Book is a great tracker for auto expenses you can pick up at Office Depot or other retailers. The logbook has convenient spaces for:
- Odometer start and finish numbers per trip
- Location and reason for business travel
- Parking fees
- Start of tax year and end of tax year odometer numbers
Vehicle Donation Tax Break
The last method you can use to lower your tax bill is to donate a used vehicle to an IRS-qualified charitable organization. While a vehicle donation does not fall under the auto expense category when filing taxes, it does add to your charitable contributions for the year if you itemize your deductions.
Reduce Car Maintenance Expenses
When you can keep your vehicle's maintenance and repair bills low, you can benefit from business travel by selecting the standard mileage rate to find the total auto expense deduction for tax purposes.
When you combine the auto deduction tip and tricks above with a reputable automobile service and repair shop, you can travel on business with peace of mind that you'll get to your destination and have a nice tax break at the end of the year!