Do you use a vehicle in your business? Then the good news is that as a business owner, you can deduct expenses for the use of a car for business purposes for your driving and your employee’s driving.
However, a vehicle tax deduction is complicated, and it pays to understand it so you can save as much as possible. There are special rules for business vehicles, and if you learn them, you can reap healthy tax savings.
Ready to get schooled? Here’s all you need to know about what car expenses can be deducted for business driving.
Standard Mileage Allowance
The IRS offers two separate ways to deduct expenses for business driving.
These are standard mileage deduction and actual expenses. We’ll go through standard mileage deduction first and will explain about actual expenses next.
Which method you choose depends on your business situation and IRS requirements and restrictions.
The standard mileage deduction for business is the simplest to use. Simply multiply the business miles your company has driven for the year by the rate provided by the IRS. Please note that this rate changes by year, so be sure to check.
Then, note the number on the correct tax form. If you want to use the standard mileage deduction method for a leased car, you must use it for every year of the lease.
There are some specific requirements for those choosing the standard mileage allowance method. These are:
- You cannot operate five or more cars at a given time, for example, as in fleet operation.
- You cannot claim a Section 179 deduction on the car
- You cannot claim the special depreciation allowance on the car
- You cannot claim actual expenses for a vehicle leased
- You can only claim a depreciation deduction for the vehicle using a straight-line method
As well as taking the standard mileage deduction, there are a few other driving expenses you can deduct too. These include:
- Interest expenses on a loaned car, depending on the percentage of time used for business matters
- Business-related tolls and parking fees that are separate from the standard mileage rate
- The business section of local personal property taxes on motor vehicles
The second method of car lease tax deduction is determining actual expenses. Your company can deduct actual expenses for business driving including:
- Depreciation (with limits discussed below)
- Vehicle registration fees
- Car repairs
- Garage rental
- Vehicle titles
If your business leases a car, then you can deduct the part each lease payment using either method of the standard mileage rate or actual expenses. However, you must stick to one method for the duration you have the lease.
Remember that you can only base your expenses on driving for business and not for personal use. Driving for personal and business use must be separated.
Depreciation Expenses for Business Driving
As mentioned above, depreciation expenses for business driving are limited. Usually, a car used for business is an asset, and it can be depreciated over some years.
However, if you opt for the standard deduction method, you can’t deduct depreciation on a business car. Instead, you must use the actual expense method to depreciate the car. Even then, special rules apply if you use the vehicle 50% or less for business matters.
Depreciation for business cars is complicated and can be overwhelming to deal with. If you’re planning to deduct depreciation on a business vehicle, it’s recommended to seek help from a tax professional for the highest deduction.
Variables to Consider
If you’re driving as a business owner, the expense of business driving counts as a genuine business expense.
That means you can easily deduct these expenses when filling in your business tax return.
The method of recording the car expenses for business needs depends on the nature of your business and the type of tax return you usually submit.
If your employees are driving, some employers decide to reimburse staff for the cost of driving, while others don’t.
However effective in 2018 up to 2025, the IRS has suspended the unreimbursed employee business expenses in the miscellaneous itemized tax reduction category.
That means you cannot implement a deduction for business driving expenses that weren’t reimbursed to staff members in your business.
Record Keeping for Car Expenses
When it comes to keeping records of business mileage and car expenses, you must keep evidence of all business driving, even if you’re using the standard deduction method.
This includes being able to show how much you paid for business driving and keeping written records, including receipts, bills, and checks.
Keep a record of how much the car cost. But also keep a record of and any improvements or repairs that made on it. You should also keep a record of the date you started using the car for your company, the mileage for every business trip, and the total miles for the year.
For each expense, note the date of the cost, and date the car was used. You should also note the purpose of the business trip and the business destination.
Every single record should be complete and clear to read, displaying the date, location, mileage, actual expense, and the purpose of the business trip.
Ready for Your Vehicle Tax Deduction?
When it comes to a vehicle tax deduction, remember that every business is different and that business driving expenses can be complicated and overwhelming to understand and deal with alone.
If you need help from a professional and reliable tax attorney, let us help. Get in contact today to discuss your needs.