Find out how to take advantage of a business vehicle deduction now so you can save money when your taxes are due.
Oh, business taxes. They keep accountants happy, but they can keep entrepreneurs up at night. As the owner of a business, you look for every opportunity to save money, and a business vehicle deduction could save you plenty.
The good news is that you don't have to have a company car or fleet vehicles to take a business vehicle deduction. In fact, the assumption in the information here is that your business is a sole proprietorship or LLC and you use your personal vehicle in the course of business.
Still, business taxes and deductions are complicated, which is why you may hire an accountant. However, the more you know - and the better records you keep - the better position you'll be in to save money when you hand off your paperwork.
What counts as a business vehicle?
Any car or truck you drive for your business is eligible for a deduction. Within that, there are multiple ways to account for deductions such as standard mileage, actual expenses, and depreciation.
The Standard Mileage Rate
The standard mileage rate is a set amount you can deduct per business miles driven. That rate varies (it was 57.5 cents in 2015 and 54 cents in 2016), but overall it is a straightforward way to use the deduction.
To use the standard mileage rate, keep a close record of the miles you drive for business. For instance, if you run a restaurant and you take a 10-mile round trip to the bank, the restaurant supply store, the office supply store, and a merchant's association meeting, you can deduct $5.40. That may not seem like much, but it can add up in a year.
The tricky part is separating personal use and business use. Leaving work to go to a doctor's appointment doesn't count as a business mileage deduction. There are some other exceptions in the standard mileage deduction that the IRS specifically mentions:
"You must not have claimed a depreciation deduction for the car using any method other than straight-line."
"You must not have claimed the special depreciation allowance on the car."
"You must not have claimed a Section 179 deduction on the car."
(The Section 179 deduction lets a business deduct the full price of equipment in the same year it is purchased.)
As the name implies, this deduction reflects the actual cost of operating your vehicle for business use. According to the IRS, actual expenses "include gas, oil, repairs, tires, insurance, registration fees, licenses, and depreciation (or lease payments) attributable to the portion of the total miles driven that are business miles." For instance, if you drive 15,000 miles in a year, and 10,000 are business miles, you can only use 66% of your total expenses toward a business deduction.
If you choose the actual expenses method for your business vehicle deduction, make it a point to keep exacting records.
If you choose to base your business vehicle deduction on actual expenses, you can also deduct depreciation (the loss of value of your vehicle due to wear and tear). Depreciation is based on mileage, so the deduction could vary significantly from year to year. Like other deductions, depreciation is only valid for the business use of your vehicle.
Standard Rate vs. Actual Expenses
So which deduction is better? The standard rate is certainly easier to manage since you only need to record your total miles and your business miles. However, if you spend a lot on maintenance, repairs, gas, and other upkeep, you might be better off deducting your actual expenses.
There are a few important things to keep in mind when you decide, though.
- From the IRS: "For a car you lease, you must use the standard mileage rate method for the entire lease period (including renewals) if you choose the standard mileage rate."
- You cannot claim depreciation on a leased vehicle; you can, however, claim lease payments.
- For a car you own, if you want to use the standard mileage rate, you have to use it "the first year the car is available for use in your business." You can switch to the actual expenses method later if you wish, but you can't go the other way around.
Of course, tax laws change regularly, and your business vehicle deduction is just one of many factors in your business tax preparation.