Understanding business vehicle expenses
We sometimes get asked how to “write-off” a new vehicle.
First of all, don’t get sucked into thinking that buying a vehicle equals automatic dollar-for-dollar savings on your tax bill. Nothing is that simple.
But when you use a personal vehicle for business purposes, you do get to include a deduction on your taxes for the business cost.
Get a deduction for business use of a personal vehicle
First of all, you need to be clear on what counts as business use. Business use of a personal vehicle generally includes any use of the vehicle that is directly connected with your trade or business . This can include driving to and from business meetings, traveling to meet with clients or customers, or running errands related to your business. It does NOT include commuting to your primary place of work–even if you take business calls during the commute.
If your business files Schedule C to report its income, there are two different methods you can use to report your vehicle expenses: 1) the standard mileage rate method and 2) the actual expense method.
Now here’s the bad news: Whichever method you use, you will need to keep records. Both methods require you to report the total number of miles the vehicle was driven, and the breakdown between business miles, commuting miles, and other (personal) miles.
Using the Standard Mileage Rate
The IRS offers a standard mileage rate that simplifies the deduction process. For the tax year 2023, the standard mileage rate is 65.5 cents per mile driven for business purposes.
You can choose to deduct this rate for your eligible business miles INSTEAD of itemizing actual expenses, BUT if you want to use the standard mileage rate for any future year, you must choose to use it in the first year the car is available for use in your business. Then, in later years, you can switch back and forth between using the standard mileage rate or actual expenses.
Using the Actual Expenses method
Alternatively, you can choose to itemize your actual vehicle expenses. Eligible expenses include costs such as gas, oil, maintenance, insurance, depreciation, and lease payments. You must keep meticulous records to substantiate these expenses. Note that if you choose to use this method in the first year, you can never use the standard mileage rate method for this vehicle.
What about a deduction for the depreciation on my vehicle?
If you are using the actual expenses method, you can claim an amount for depreciation on your vehicle as one of those expenses.
The general idea behind depreciation for taxes is to spread the cost of a vehicle out over its “useful life,” instead of writing off its whole cost the year you buy it. For tax purposes, the IRS generally considers five years to be standard for most vehicles, although you may qualify for some extra bonus depreciation in the first year. Of course, you are only able to claim a percentage of the total vehicle depreciation as a business expense, based on the percentage of business use.
If you use the standard mileage method, you do not deduct additional depreciation on your vehicle. The standard mileage rate is meant to include an allowance for depreciation on the vehicle.
So which method should I use?
You have to choose between using the standard mileage rate and actual expenses. Taxpayers who choose the standard mileage rate may not also deduct actual expenses. Remember that if you EVER want to use the standard mileage rate, you must use that method in the first year.
Because of this, we generally recommend starting with the standard mileage rate so that you have the option going forward to switch back and forth between methods. Each year after the first, you’ll want to calculate your vehicle expenses using both methods and then choose the method with the larger deduction and greater tax benefit.
You have to keep records, no matter which method you choose
Small business owners must maintain proper documentation to substantiate their vehicle-related deductions. Here are some essential steps to follow:
Mileage Log: Keep a detailed mileage log that records every business-related trip. This should include the date, starting and ending locations, purpose of the trip, and mileage driven. For actual expenses, a mileage log helps establish business use percentage. You can use an app for this to make record keeping easier. There are stand-alone apps and there is also one built right into the QuickBooks Online mobile app.
Receipts and Records: Keep receipts and records for all vehicle-related expenses, including gas, maintenance, insurance, and loan or lease payments.
Vehicle Information: Maintain records of your vehicle's purchase price, date of purchase, and any improvements or modifications made for business use.
Special considerations
It's important to note that the IRS may have specific rules for different types of vehicles. If you are using a truck, van, or “heavy” SUV that weighs over 6,000 pounds, you will want to look into these regulations.
If your business files as an S-Corp, use an Accountable Plan
If your business files taxes as an S-Corporation and you occasionally use your personal vehicle for business purposes, then you need to follow a different methodology. In this case, the business needs to reimburse the S-Corp owner for the use of the vehicle under what’s called an Accountable Plan. Reimbursing yourself under an Accountable Plan works essentially the same as if you were reimbursing any employee for using their personal car for business purposes.
Under your Accountable Plan, you will want to keep a mileage log of all the business miles driven. Then you will want to have the S-Corp reimburse you personally at the IRS standard mileage in a timely manner. Note that this method only applies to passenger vehicles with a GVW of less than 6,000 pounds.
If you are not following the requirements for the reimbursements to be considered done under an Accountable Plan, then all reimbursements whether for mileage or actual expenses like gas, must be inlucded with wages on your W-2.
Shouldn’t I have my business purchase and register the vehicle, so I can get a bigger write off?
If, for instance, you own a towing company and are purchasing a tow truck, then yes, you should have a the company purchase, title, and insure the vehicle.
But if you are purchasing a vehicle that will be used regularly as a personal vehicle, then it generally doesn’t make sense to have the business purchase and register the vehicle.
In this case, the decision mainly hinges on insurance and liability considerations. It is more expensive to purchase a commercial policy than a personal auto policy. There are also more hoops to jump through to purchase the car in your company’s name.
In addition, if you use your new “company car” for personal use, then you will need to include the value of the personal use on your W-2 as a fringe benefit, which sounds like nothing but a headache.
Conclusion
If you’re using your vehicle for your business, then you deserve to be able to claim the cost as a business expense. But it’s not a magic bullet. Take the time to understand the IRS rules and regulations that apply to your situation. By qualifying for business use, tracking expenses, and maintaining meticulous records, you can maximize your deductions and reduce your tax liability. Remember that tax laws can change, so make sure you stay up to date with the latest guidelines and maintain communication with your accountant.
Additional Information: Publication 463 (2022), Travel, Gift, and Car Expenses
