If you aren't sure how to write off a car for business, you may be missing out on valuable tax savings. Learning how to write off a car as a business expense is essential if you plan to purchase or use a vehicle for work.
The good news is that business owners are likely to be eligible for a tax deduction if they use their car only for business or if the vehicle is used for both business and personal use. Knowing how to deduct car expenses correctly could save your business a significant amount of money.
Two Ways to Deduct Vehicle-Related Expenses
There are two IRS-approved options for writing off expenses incurred by a business vehicle: the standard mileage rate and the actual expense method. One of these methods will generally result in a larger deduction than the other, depending on factors such as how far you drive in a year. A tax planning expert can help you work out which method would give you the largest deduction on your business tax return.
Standard Mileage Rate
The standard mileage rate deduction allows you as a business owner to write off business expenses incurred by your vehicle based on the number of miles that you and your employees drive. The miles included in this calculation must only be for business-related purposes. You can’t deduct the cost of personal trips that you made in your car as a business expense.
For example: A business owner traveling from Jacksonville, Florida to Miami for work purposes could deduct the cost of their trip. However, if they make this same trip as a vacation, it isn't covered.
The standard mileage rate is intended to cover all of the costs associated with owning a vehicle for business use, including gas, maintenance, repairs, and depreciation. This means that these costs can’t be deducted separately.
How to Calculate Mileage
The IRS standard mileage rate for 2023 is 65.5 cents per mile. To calculate your business mileage deduction, it's essential to track all of the business miles that you travel carefully. This not only means that you will claim the right amount but it also means that you can provide proof if your business is ever audited by the IRS.
There are two common ways of tracking business miles:
Using a specialized app: There are several apps on the market that record all of your miles without you having to write anything down. Mile-tracking apps are convenient because they log your miles automatically.
Logging your trips manually: A log should be filled in every time you make a trip. To provide legitimate information to the IRS, you must log the date, the odometer reading at the beginning and end of the trip, and the (business-related) purpose of your trip.
If you are confident that you and your employees can log all of the relevant details, using a manual logging method is a cost-effective option. However, if you believe there might be a chance that you forget to log your miles, using an app may be the best option.
Who Can Claim the Standard Mileage Rate?
There are some conditions your business must fulfill to use the standard mileage rate:
You must own or lease the car.
Your business can't operate five or more cars at the same time, as this is considered a fleet.
If you have claimed depreciation deductions in the past, it must have been using the straight-line method.
You must not have claimed a deduction on the car using Section 179 or the special depreciation allowance.
You can't have claimed actual expenses after 1997 for any car you leased.
Actual Expenses
An alternative method for writing off a car for business is the actual expenses method. Using this method, you claim the actual costs of keeping, maintaining, and using a vehicle for work. This includes any fuel you use and necessary repairs as well as the insurance costs and depreciation.
Unlike the standard mileage rate method, every cost needs to be calculated separately, making this a more challenging way of calculating your deduction. Businesses that wish to use the actual expense method can often benefit from working with a tax professional to avoid common tax mistakes (such as providing inaccurate information to the IRS).
What Happens If You Use Your Car for Personal and Business Use?
Many business owners use their vehicles both for business and personal reasons. In this case, you can claim the percentage of your vehicle’s expenses that you can attribute to business use.
How to Calculate Travel Attributable to Business Use
Business owners whose company car doubles as a personal vehicle must calculate the percentage of travel that they can justify as being for business versus their own personal use. To calculate the business use percentage, divide the total number of business miles by the total number of miles the car has driven during the tax year. To this end, keeping clear and contemporaneous records of your business trips is extremely important both for your own calculations and as proof for the IRS.
Once you've calculated the percentage, multiply it by the total of your actual vehicle expenses for the year. This sum will be the amount you can deduct. For example, in the case of a vehicle that is used for business 60% of the time with a depreciation expense period of five years, you could claim 60% of all vehicle costs over those five years.
What Happens If I Don't Keep Records of Mileage?
Whether you're using the standard mileage rate method or the actual expense method, getting a tax write-off for your vehicle relies on accurate record-keeping. Your business must therefore find an effective way to log all business miles.
Failure to provide accurate logs of the miles you claim could result in a penalty from the IRS as well as losing the deduction (and the corresponding portion of your tax refund, if applicable).
Section 179 and Business Vehicles
Some businesses can take advantage of the provisions of Section 179 to deduct the full purchase price of their vehicle in the year it is purchased. This is an alternative to depreciating it over the course of several years. However, deducting your vehicle through Section 179 is only possible if the vehicle meets the qualifying conditions.
Whether or not your vehicle qualifies for Section 179 vehicle deductions will depend on several factors, including:
The type of vehicle you buy
The weight of the vehicle
The structure and intent of the vehicle
The percentage of time the vehicle is used for business purposes
Small businesses especially can benefit from a Section 179 write-off to improve cash flow. However, it's worth consulting a tax professional to understand how your business can best take advantage of vehicle-related tax deductions.
Maximize Your Vehicle Deductions
Getting to grips with the many facets of the tax system can be tricky and time-consuming. Business owners looking to take advantage of all of the applicable vehicle-related deductions this year can benefit from the help of a tax professional.
Apart from taking the hassle of filing your taxes off your hands, a tax professional can explain the deductions and tax credits that may have changed since last year and help you plan your tax strategy going forward.
