Deducting Your Car Expenses
Owning a business often requires you to make investments that eat into your profits.
Fortunately, the IRS allows business owners to deduct the business-use portion of their personal vehicle.
Being able to deduct your car expenses without having to buy a dedicated business vehicle is a huge win. That’s what landed vehicle expenses on my list of best tax deductions.
Not only can you deduct the cost of operating your car for business, the IRS offers two different methods you can use to calculate the deduction.
Namely, the mileage method and the actual expense method.
In this blog post, we’ll delve into both methods to help you determine how you want to deduct your car for business.
How It Works
The mileage method is the simplest way to deduct your car expenses.
You simply track the number of miles you drive for business-related activities, then multiply that by the IRS’s standard mileage rate.
The IRS updates the standard mileage rate every tax year. For 2023, the rate is 65.5 cents per mile.
So if your total miles driven for business in 2023 is $10,000, your deduction would be $6,550 (10,000 x $0.655).
The mileage method is unique in that you can receive a tax deduction greater than the total amount you spend operating the vehicle.
For instance, let’s say you purchase a $20,000 vehicle and you drive 100,000 business miles over the course of the vehicle’s useful life.
Assuming that the average standard mileage deduction over the life of the vehicle is $0.60 per mile, you would be entitled to tax deduction of $60,000.
Assuming that your other car expenses are less than $40,000 total over the life of the vehicle, your lifetime deductions on that vehicle would exceed the actual costs associated with it.
What You Need
To use the mileage method, you need to keep a detailed mileage log that records the date, purpose, and distance of each business trip.
You can do this manually with a notebook or digitally with various mileage-tracking apps. MileIQ is the industry standard.
Your log should include:
- Date of the trip
- Starting point and destination
- Purpose of the trip (e.g., client meeting, office supply run)
- Odometer readings (start and end)
- Miles driven
Business mileage is deductible roundtrip!
Pros and Cons of Using Mileage
- Simplicity: You don’t have to keep track of every receipt for gas, maintenance, and other car-related expenses.
- Time-saving: A quick entry in a mileage log is all you need each time you use your car for business.
- May result in a lower deduction compared to the actual expense method if your vehicle is expensive.
Actual Expense Method
How It Works
The actual expense method allows you to deduct the actual costs of operating your car for business purposes.
Eligible car expenses include:
- Registration Fees
- Lease Payments
To calculate your deduction, you would:
- Calculate the total car expenses for the year, by category.
- Determine the business-use percentage of your car (business miles/total miles).
- Multiply the total expenses by the business use percentage.
I want to emphasize: in order to deduct your car expenses using the actual expense method, you still need to calculate your business-use percentage.
That means you need to track your mileage no matter which method you choose!
What You Need
- Detailed records of all car-related expenses: This includes but isn’t limited to gas receipts, maintenance invoices, and insurance premiums.
- Business vs. personal mileage: You still need a detailed mileage log in order to calculate business-use percentage.
Pros and Cons of Using Actual Expenses
- Potentially higher deduction: If your car is expensive, has high operating costs, or you’ve had to invest in significant repairs, this method can result in a higher deduction.
- Requires meticulous record-keeping: You’ll need to keep all relevant receipts and records.
- More complicated: This method can be cumbersome as you’ll need to account for depreciation, which may require professional help.
Vehicles with a 6,000 lb. + GVWR
For normal passenger vehicles, the IRS imposes limits on the total amount of accelerated depreciation that can be claimed in the initial year of service.
Vehicles with a gross vehicle weight rating (GVWR) of 6,000 lbs. can be depreciated on a more accelerated schedule.
In many cases, Section 179 or bonus depreciation can be claimed to deduct your car purchase entirely in the first year.
This is the tactic that many use to deduct G-Wagons and other heavy, luxury vehicles.
I highly recommend discussing your situation with a tax professional before selecting the actual expense method.
Proof of Mileage
As I’ve outlined, both methods for deducting automobile expenses require maintaining a mileage log.
It’s important to note that the burden of proof is on you as the taxpayer. The IRS doesn’t have to take your word for it!
In order to fortify your mileage records, I recommend scheduling some type of maintenance on your vehicle on January 1st of every year.
When you get your car serviced, the mechanic will include your vehicle’s odometer reading on their paperwork.
Performing maintenance on your vehicle on January 1st of each year will provide you with verifiable, third-party proof of your beginning and ending mileage for each year.
Which Method to Choose?
The best method depends on your circumstances:
- Short-term vs. Long-term: If you have a new, fuel-efficient car, the mileage method may be better long-term. In contrast, if you plan to purchase a heavy, luxury vehicle or you expect high maintenance costs, the actual expense method might be more beneficial.
- Record-keeping: If you’re not great at keeping detailed records, the mileage method is more straightforward.
- Professional Guidance: For complicated cases or if you’re unsure, it’s always a good idea to consult with a tax professional.
If you choose to deduct your car expenses using the mileage method, you can switch to using the actual method down the road (pun intended).
However, if you choose the actual method initially, you can never switch to the mileage method for the same car.
Note that the method you choose to deduct your car expenses with is specific to that particular vehicle.
If you use multiple vehicles for your business, you can use the mileage method for one and the actual expense method for the other if you so choose.
How Do You Deduct Your Car Expenses?
Both the mileage method and the actual expense method have their advantages and drawbacks.
The mileage method is simpler but could result in a lower deduction. The actual expense method can yield higher deductions but requires more meticulous record-keeping.
Assess your situation, weigh the pros and cons, and deduct your car expenses using the method that makes the most sense to you.
Do you use the mileage method or the actual expense method?