Now that you have started your business, you’ve heard you can write off automobile expenses. So are you ready to buy that luxury sports car and write off the costs of driving around town and run errands?
Well, hold your horses. As with most things tax-related, it’s not that simple. There are a few things you need to keep in mind before you start, for example, writing off the mileage to go pick up your dry cleaning.
The first thing you will need to do is divide up your mileage between business and personal purposes. You cannot deduct expenses related to personal mileage. So I guess you can’t write off that trip to the dry cleaners.
Next, you will need to determine the method you will use to determine the amount of your deduction. You will need to select either the Standard Mileage Rate Method or the Actual Expense Method. What’s the difference between the two? Let’s take a look.
Standard Mileage Rate Method
With either method, you will need to have kept track of your mileage. There are apps for that, like Milebug, but even if you want to do it manually, you want to make sure you record:
1. The date of the trip;
2. The name of the client;
3. How many miles you drove for the meetings or for getting work done for the client.
To calculate your deduction with the Standard Mileage Method, you need to do the following:
- Take the total number of business miles driven during the year and multiply that by the mileage rate the IRS determines is to be used for the year. The current standard mileage rate is 56.6 cents per mile. Don’t memorize that amount, though—mileage rates change from time to time, often annually.
- Take the amount calculated in the previous step, and add that to the business-related interest on the car loan, state and local property taxes, tolls and parking you incurred during the year.
Actual Expense Method
In the Actual Expense Method, you can deduct the actual amounts you spent related to the business mileage you traveled. The following are the types of expenses you can deduct:
1. Gas and oil.
2. Repairs, maintenance, and tires.
3. Lease and rental fees.
4. Car washes (There are some restrictions for paying your child to do this, but that is a subject for another post).
5. Cost to keep your vehicle in a garage.
6. Tolls.7. Parking fees when you are driving (for business purposes, of course).
8. License and registration fees.
9. Insurance premiums.
Once you have totaled the total amount of expenses spent on your vehicle, you would then need to determine the number of business miles driven during the year and divide that amount by the total number of miles driven for the vehicle during the year. Take that percentage and multiply it by the actual amount of expenses incurred during the year.
Pretty simple, huh? Well, there are some other considerations. For instance, regardless of the method selected, you can also deduct the business portion of the interest on the car loan, state and local property taxes, parking fees, and tolls. If you depreciate the car and truck you use in your business, you will have to use Schedule C. The IRS won’t let you use Schedule C-EZ if you depreciate assets.
Leasing a Vehicle
That’s all well and good if you own the car or truck, but what about leasing a vehicle? You can deduct the cost of the lease, with some restrictions. If you lease a vehicle, you can deduct the portion of each lease payment that is for the use of the car for business or work related matters. However, the portion of the lease payment that is used for commuting or for personal use is not deductible. Additionally, you may have to make advance payments as a part of your lease agreement. These advance payments are required to be allocated over the entire period, so you only get to deduct the portion of the advance payment related to the current year.
Can You Deduct Your Commute?
Ok, let’s say you have a regular job and not a business. Can you deduct costs for traveling from your home to your job and back? In other words, can you deduct commuting costs? Unfortunately, no. However, there are exceptions. For instance, if you have a temporary work location outside the metropolitan area where you live, the expenses to that location are deductible. Note the term “outside;” you can’t deduct your expenses if the travel is within your city or town. Your daily transportation costs can be deducted if:
1. You have one or more places away from your home where you regularly work, or
2. Your home is your principle place of business and you go between there and another location in the same business on a regular basis, even if the work is temporary and regardless of the distance.
Also, if you have a part-time job, you cannot deduct travel expenses from your home to that job either.
Alright, what if you slap a sign for your business on your car, and drive it to your employer’s office. Can you deduct your mileage now because you are advertising your business? Nope, you are still commuting. However, you may be able to deduct the cost of the sign as advertising expense.
That’s a lot to take in, isn’t it? Don’t be afraid to ask an accountant if you have questions and for guidance on taking the deduction for automobile expenses. I always enjoy helping my clients understand their tax situation, and I would rather have you ask what something means than have you make a decision based on information about which you are confused. If you have questions, find a local accountant to give you a hand. We love to help people with their taxes, and always invite questions. You can also submit your questions in the comment section below, and I would be glad to answer them.
This article was originally published by Outright.com. Chris Peden, CPA, CMA, CFM has over 15 years in the corporate world helping companies meet their regulatory compliance requirements. He also assists small business owners with organizing and making sense of their finance information. You can reach him at firstname.lastname@example.org, or check out his blog at www.theaccountingscribe.com. In accordance with Circular 230 Treasury Department Regulations, we are required to advise you that any tax advice contained in this article may not be relied upon to avoid penalties under the Internal Revenue Code. If you are interested in a written opinion that can be relied upon to prevent the imposition of tax-related penalties, please contact the author.