Is Your Vehicle Used for Business Purposes? There’s a Deduction for That
For many workers, a vehicle is as important to their operations as their office or their staff. As a vital part of the business, getting every last bit of value out of the vehicle is a priority.
One way to optimize vehicular value is to deduct any eligible vehicle-related expenses. In addition, certain people may be able to deduct any expenses related to overnight travel as well. That’s a deduction double dip that can offset vehicle maintenance and use.
Who Can Deduct Vehicle-Related Expenses from Their Taxes?
With only a few exceptions, people must be self-employed to deduct vehicle and overnight travel expenses. Exceptions include qualified performing artists, fee-basis government officials (state or local), and Armed Forces reservists.
The IRS does make a distinction between business vehicle use and personal vehicle use. Any expenses incurred during personal use are not deductible. For example, if a business owner drives 10,000 miles in their car during the year, but only 6,000 miles for business purposes, they may only deduct 60 percent of their qualified vehicle expenses.
What Expenses Qualify for a Vehicle Use or Travel Tax Deduction?
Almost all vehicle-related expenses are tax-deductible. They include:
- Lease payments
- Maintenance and repairs
- Parking fees
- Registration fees
These expenses are only deductible if they are incurred during the following:
- Traveling from one workplace to another for business purposes. This is only the case if traveling within the boundaries of your tax home. A business owner’s tax home is the general area that the business occupies and operates in. In most cases, this is the municipality or city that the company is physically located in.
Many business owners use their home as a primary place of doing business. If a home office does qualify in this way, any transportation expenses incurred from home to another place of business are deductible.
These expenses are not deductible for people traveling from home to their place of work if they do not have a qualified home office. These are considered personal commuting expenses, instead.
- Visiting clients or customers within your tax home.
- Attending a business meeting or other company events at a location other than your primary workplace.
When traveling overnight for business, usually outside your tax home, the same rules apply for vehicle use. However, other expenses incurred as a result of overnight travel (lodging, meals, etc.) are instead deductible as travel expenses.
Standard Mileage Rate or Actual Expense Deduction – Which is Better for Your Taxes?
Business owners have two options when deducting their vehicle expenses and preparing their taxes. There’s the standard mileage rate approach and the actual expenses approach. Here’s a look at both:
- Actual expenses method – The actual expenses method requires business owners to track their expenses down to the exact amount. The above expenses qualify under this method.
Who should opt for the actual expenses method? In general, it’s a better option for people who only use their vehicle for occasional business use. This is partly because the actual expenses method allows taxpayers to deduct vehicle depreciation.
However, business owners must track their costs with precision if opting for the actual expenses method. For some people, that’s a prohibitive time commitment. Another concern – if a taxpayer elects for the actual expenses method, the claimed vehicle cannot be claimed using the standard mileage deduction going forward. For the rest of the vehicle’s life, it is only eligible for the actual expenses deduction method. This can be an issue for people planning on using their vehicle more and more with time.
- Standard mileage rate – The standard mileage rate allows the taxpayer to deduct a flat rate per mile from their taxes. This rate is defined by the IRS and is typically adjusted year-over-year. In 2022, the rate was $0.585 per mile from January to July, and from August to December, it was $0.625. The mid-year adjustment was due to skyrocketing fuel costs. Again, the standard mileage deduction can only be used with mileage accrued during business use.
There are a couple of advantages associated with the standard mileage deduction. For one, taxpayers are not locked into the standard mileage method like they are with the actual expenses method. Taxpayers can switch to tracking actual expenses in future years. Also, taxpayers who drive their vehicle heavily (ride share and delivery drivers, for example) tend to get better returns from the standard mileage deduction.
The standard mileage deduction covers maintenance, fuel, and most other vehicle-related costs, including depreciation. It does not rope in tolls, registration fees and parking fees, however. These can be deducted on top of the standard mileage rate, but business owners will need to track these expenses to claim them.
There are some exceptions to standard mileage deduction eligibility. For example, standard mileage deductions cannot be used for a business if it operates more than five vehicles at once for business purposes (like with fleet operations). Also, if a Section 179 deduction has been claimed on the vehicle, if a special depreciation allowance on the vehicle has been claimed, or if actual expenses have been claimed on the vehicle in the past, then the standard mileage deduction may not be applied.
If Your Business Does a Lot of Driving, Vehicle Use Deductions Add Up Quickly
Fuel, oil, maintenance, registration fees, even depreciation expenses are tax-deductible for self-employed business owners. Depending on how much your company relies on vehicle use, those deductions can add up into the thousands.
If vehicle-related tax deductions are confusing for your organization to manage, a tax expert can help. A trusted tax preparer and planner can identify which deduction approach to take – actual expenses vs. standard mileage – and ensure they are properly accounted for on your return.
- Employee or Independent Contractor: Determining Worker Status and Taxation Rules - November 8, 2023
- Divorce and Taxes: Tax and Alimony Considerations - November 3, 2023
- Charitable Contributions: How to Deduct and What Qualifies - October 20, 2023