Vehicle Tax Deduction for Small Businesses

Whether you’re self-employed or run a small business, chances are you use a car to get from point A to point B. Luckily, during tax season, you can claim your vehicle when Uncle Sam comes barging in. We’re going to go over the qualifications and methods you can use to estimate your expenses so you can drive away from the tax preparation process or an audit with more money in your pocket.

How Do I Qualify for Vehicle Deductions?

It’s quite simple. You must drive your personal vehicle from your workplace or home office to a separate, business-related location such as a bank, convention center, lawyer’s office, etc. The vehicle needs to be a regular-size car, SUV, van or pickup. Utility vehicles such as dump trucks aren’t qualified.

There are a few travel situations that can’t be written off, though. First off, commuting from your home to your work location is non-deductible. Secondly, any personal detours on your way home from a business-related location are recognized as personal mileage. For example, you’re driving back from a conference in the city and along the way, you swing by a golf shop to check out some putters. The remaining mileage from the golf shop to your home is no longer deductible. Sad, but true.

Standard Mileage or Actual Costs?

To calculate your vehicle expenses, there are two methods the IRS allows – standard mileage and actual costs. Unfortunately, once you choose an option, you’ll be stuck with it for a couple of years. So, the ball is in your court to decide which way provides the largest tax benefits for your business. Let’s look at both approaches.

Standard Mileage Rate

With this method, you keep track of your car’s total mileage within a given calendar year. For each mile driven, there’s a preset rate the IRS establishes. The rate fluctuates annually, and sometimes semi-annually, to correlate with the ever-changing costs of operating a vehicle. In 2016, the rate was 54 cents per mile, while this year, it dropped to 53.5 cents per mile.

The formula for calculating your deduction is: Total miles X (times) yearly mile rate. If you accumulate 30,000 miles in 2017, you’ll receive a deduction of $16,050.

This system will benefit you in the long run if you’re driving a fairly reliable car with minimal operating costs. It is crucial to stay organized, so make sure to store a log in your car’s glove compartment and record your miles every time you travel.

Actual Costs

This approach allows you to deduct your actual costs to operate your vehicle, which include:

• Fuel
• Repairs
• Tires
• Insurance
• Lease Payments
• Oil
• Registration
• Washes
• Fees
• Depreciation

To gauge your expenses, you need to find out what percentage of your car is used for business purposes. Let’s say your car is used for business 85% of the time and your yearly expenses total $12,000.

Use this formula to calculate: total expenses ($12,000) X (times) business-use percentage (85%). This comes out to a vehicle deduction of $10,200.

As opposed to the standard mileage system, generally, the higher your car’s operating costs, the better your deduction will be. So if you’re driving a gas-guzzling truck or van, you may consider heading down this route.

With all of this in mind, it is imperative to track all of your expenses. The IRS is certainly not going to take your word for it, so you need proof to substantiate your claims.

Client Books, our proprietary web-based bookkeeping system, is the easiest way to keep track of your expenses. Connect your bank account and credit card information, and our system will then automatically pull up all of your transactions, saving you time and massive headaches.