How to Deduct Auto Expenses

Posted by The Bean Team on 9/4/18 8:00 AM

How to Deduct Auto Expenses

7 MIN READ

If you use your vehicle for business purposes, you may be wondering if and how you can deduct this auto expense from your taxes. The short answer is yes. Business use of a vehicle is a legitimate deductible expense and can help business owners save on their taxes. 

Let’s break down the rules.

How it Works

First, what constitutes a business vehicle? A business vehicle is any car, SUV, or truck used for business activities. Pretty simple, right?

So what does not constitute a business vehicle? Any vehicles used for equipment (think dump trucks) or hire (think taxis) do not qualify for tax deductions. Again, pretty straightforward.

There are two different ways business owners can deduct auto expenses: using a standard mileage rate or using the actual expense method. As a general rule of thumb, if you have an economical vehicle, the standard mileage rate will likely give you the bigger deduction. For vehicles with higher operating costs (for example gas or repairs), the actual cost method will likely play more to your advantage for tax purposes.

If you qualify to use either the standard mileage rate or the actual expense method, you should consider calculating your deduction both ways and choosing the option that gives you the largest deduction. 

Employees and people who are self-employed can use a standard mileage rate (54.5 cents for every mile for 2018) as mandated by the IRS. Claiming the standard mileage rate typically requires less paperwork, and saves you the time of having to tally up all your car-related expense receipts when filing your taxes. 

To use the standard mileage rate for a car you own, you must choose to use this method the first year the car is placed in service for your business. In later years, you can choose either the standard mileage rate or the actual expense method. 

If you choose to use the standard mileage rate for a car you lease, you must use this method for the entire lease period, including renewals. The lease payment amount is not deductible when using the standard mileage rate for a leased vehicle.

Business owners use two numbers for each vehicle to determine the number of miles driven for business: 

  1. Total number of miles driven during the year
  2. Total number of miles driven just for business

To track your total mileage for the year, simply record the odometer reading on the day you start using a vehicle for business and on the day the year ends. That part is easy.

It is a bit trickier to determine the total number of miles driven just for business. As the name suggests, business miles are the number of miles actually driven for business, for example to meet a client. Any miles driven to the office supply store, or the bank, or to meet with your accountant, for example, all count. However, commuting between work and home is not deductible. Also, personal trips to the store, even on the way home from a business trip, don’t count as business miles. 

To use the actual expense method, you need to determine what it actually costs to operate the vehicle for the portion of time it has been used for business (i.e. the actual expenses incurred during the business use of the vehicle). You can also deduct actual vehicle expenses—such as interest on an auto loan, parking and tolls, and registration fees—if you can prove they are business expenses. Auto-related expenses that can be deducted include:

  • Gas/oil
  • Maintenance/repairs
  • Tires
  • Registration fees and taxes
  • Licenses
  • Insurance
  • Vehicle loan interest
  • Rental/lease payments
  • Depreciation
  • Garage rent
  • Tolls/parking fees

The percentage of time—based on miles—the vehicle is used for business determines the portion of these expenses that can be deducted. 

Let’s break it down:

In a year, you spent $2,500 on gas, oil, and repairs, $750 on fees and taxes, and $2,000 on loan interest and insurance on your business vehicle. The car is old, and there is therefore no depreciation write-off. In this scenario, your total “actual expenses” come to $5,250.

You drove 20,000 miles total, 17,508 of which were business miles. The business-use percentage is therefore 87.54% (17,508 miles/20,000 miles).

Using the actual expense method, you could deduct $4,595.85 (87.54% of $5,250).

Using the standard mileage rate, you could deduct $9,541.86 (17,508 x 54.5 cents).

In this scenario, you get a bigger tax benefit using the standard mileage rate.

Depreciation Deduction

A depreciation deduction is the amount you can deduct over time for general wear and tear on your vehicle. The Tax Cuts and Jobs Act (TCJA) has gotten a lot of attention, but the favorable first-year depreciation breaks for business vehicles introduced by the TCJA have largely flown under the radar. 

The TCJA dramatically increases the “luxury” auto depreciation allowances for new and used passenger vehicles acquired and placed in service (i.e. used for business) after December 31, 2017.

For vehicles put to business use in 2018, the maximum allowances are:

  • $10,000 for Year 1 (or $18,000 if you claim first-year bonus depreciation—see below)
  • $16,000 for Year 2
  • $9,600 for Year 3
  • $5,760 for Year 4 and thereafter until the vehicle is fully depreciated

If you do not use your vehicle entirely for business, these allowances are scaled back proportionately. These amounts will be adjusted for inflation for 2019 and beyond. 

The TCJA increases the maximum first-year luxury auto depreciation allowance to $18,000 if you claim first-year bonus depreciation for a new or used passenger vehicle placed in service between September 28, 2017 and December 31, 2026. To claim the first-year bonus depreciation deduction on a used vehicle, the vehicle must be new to you or your business. 

For new and used "heavy" (GVWR above 6,000 pounds) SUVs, pickups, and vans used over 50% for business and placed in service between September 28, 2017 and December 31, 2022, the TCJA allows unlimited 100% first-year bonus depreciation. Heavy SUVs, pickups, and vans are treated as transportation equipment rather than passenger vehicles for tax purposes, which is why different rules apply.

Here again, a used vehicle cannot have been previously used by you or your business.

If you do not use a heavy vehicle over 50% for business, you must instead depreciate the business-use percentage of the vehicle’s cost over a six-year period.

So, what does this mean exactly? If in 2018 you bought a new $65,000 heavy SUV and used it 100% for your business, you can deduct the entire $65,000 from your taxes. If you only use the vehicle 65% for business, you can deduct $42,250 (65% x $65,000).

If you instead buy a used $40,000 heavy SUV and use it 100% for business, you can still deduct the entire $40,000 expense using the 100% first-year bonus depreciation break. Again, if you only use the vehicle 65% for business, your first-year bonus depreciation deduction is $26,000.

Filing Your Taxes

If you are self-employed, you will include your deductible vehicle expenses on Schedule C. Note: If you are a single-member LLC and file a Schedule C with your personal tax return, you are considered self-employed for tax purposes. 

If your business is structured as a partnership, the partnership must complete its own tax return; you will use Schedule K-1, which lists your share of the partnership’s business expenses, to complete your personal tax return.

Details Matter

It should come as no surprise that the IRS likes good records. When it comes to deducting auto expenses, the IRS is particularly strict. If you plan on taking a vehicle deduction, be sure to keep a detailed vehicle expense log, where you’ll record things like business miles.

To recap, auto expenses are tax-deductible. Whether you choose to use the standard mileage rate or the actual expense method to take the deduction is really a numbers game. In general, if you drive a lot for work and have minimal vehicle expenses, you will save the most using the standard mileage rate. And lastly, always keep good records. Keep a mileage log (documenting the date of each tax-deductible trip you make, how many miles you drove, and for what purpose) that will allow you to prove you’re eligible to deduct your auto expenses if need be. If you’re filing using the actual expense method, you’ll need to track all of your auto expenses, too.

Deducting auto expenses can take a bit of time and thought, but the tax savings are usually well worth the effort.

Click here to contact the Bean Team! 

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