Vehicles are one of the costliest items to own. Besides having to make a large initial investment, you also need to deal with the ongoing costs of using and maintaining your vehicle. Fortunately, you can take certain measures to offset your vehicle expenses, one of which is claiming tax deductions.
Follow the tips below to take full advantage of tax deductions to substantially lower your vehicle ownership cost.
Choose Between Standard Mileage Deduction and Actual Expenses
If you're self-employed or a freelancer, you're eligible for certain tax deductions if you use your vehicle for business purposes, regardless of whether it's a personal or company vehicle. The Internal Revenue Service allows you to deduct for business driving in two different ways: standard mileage deduction and actual expenses. Your choice of the deduction method depends on your specific situation and ability to meet IRS requirements.
Standard Mileage Deduction
Even though it changes every year, the standard mileage deduction is the easiest way to deduct business vehicle expenses. All you need to do is multiply the number of miles you drive your vehicle in a certain year by the tax rate for the same year and enter the amount in the appropriate tax form. If you plan to use this method to get deductions for a leased vehicle, you have to keep using it until the end of the lease.
To become eligible for standard mileage deduction, you're required to satisfy the following IRS requirements:
- You mustn't use more than four vehicles at the same time if you're operating a fleet.
- You mustn't have claimed a deduction for the depreciation of your vehicle in any other way except the straight-line method.
- You mustn't have taken the special depreciation allowance on your vehicle.
- You mustn't have taken a Section 179 deduction on your vehicle. This type of deduction enables you to deduct the cost of buying and using a vehicle for business purposes.
- You mustn't have used actual expenses to claim deductions on a leased vehicle.
Other than claiming the standard mileage deduction, you're allowed to deduct a number of other driving expenses, such as:
- Interest expenses on your auto loan based on the amount of time you use your vehicle for business purposes.
- The business portion of the local personal property taxes you need to pay for your vehicle.
- Certain business-related parking and toll fees.
If you choose to use actual expenses, you can claim deductions on certain expenses for business driving, such as:
- Oil changes.
- Garage rent.
- Vehicle registration fees.
- Vehicle titles.
In general, a vehicle meant for business use is regarded as an asset, and its cost is a capital cost, meaning it can depreciate in value over time. It's important to note that you can only deduct depreciation on your business vehicle if you use the actual expense method. Also, you have to comply with special rules if you don't use your vehicle more than 50% for business purposes.
Donate a Vehicle to Charity
If your vehicle is showing signs of aging, it may be a good idea to donate it to charity instead of trying to get a little money back by selling it. Besides eliminating the hassle of placing an ad and haggling with potential buyers, donating your vehicle also enables you to get a tax deduction for its current market value. You can use this method to reduce your personal or business tax bill. Make sure you ask the charitable organization to give you an official receipt, which should show the value of the donated vehicle.
Keep a Good Record of Vehicle Expenses
If you want to get tax deductions on business-related vehicle expenses, you must be able to show the IRS that you paid for those expenses. This is important even if you're opting for the standard mileage deduction method. To provide proof of your vehicle expenses, you need to keep a written record containing information from your receipts, bills, and canceled checks. For each expense, write down the following information:
- Date of the expense.
- Date on which you used the vehicle.
- Business destination.
- Business purpose.
In addition, you should include general information on your business vehicle, such as:
- Cost of the vehicle.
- Cost of improvements you made to the vehicle.
- Date on which you began using the vehicle for business purposes.
- Total miles traveled for the year.
If you want to make sure your tax deductions will be processed smoothly, all your business vehicle expense records must be complete, accurate, and timely.
Non-Deductible Business Vehicle Expenses
To gain a better understanding of tax deductions on expenses for business driving, you should also know what expenses can't be deducted. Below is a list of non-deductible vehicle expenses:
- Expenses incurred when using the vehicle for personal purposes.
- Commuting expenses.
- Expenses for transporting business materials while commuting.
- Expenses incurred when using the vehicle for advertising, such as putting a sign on the vehicle and driving around.
Who Qualifies for Business Vehicle Deductions?
The costs incurred in using a vehicle for business purposes are legitimate expenses. Therefore, if you're a business owner or freelancer, you're allowed to deduct such costs on your business tax return. You can record the tax deductions for your business in a number of ways. In most cases, business owners use the Schedule C form to report their profits and losses.
If you're an employee, you may not receive reimbursement from your employer if you use your personal vehicle for work purposes. In the past, employees who weren't reimbursed for business-related driving costs were allowed to list those expenses under miscellaneous itemized tax deductions on their Schedule A forms. However, the IRS suspended deductions for unreimbursed business driving expenses following the implementation of the Tax Cuts and Jobs Act.
If you need help maximizing your tax deductions for business vehicle expenses, feel free to speak with the knowledgeable and helpful staff at Pasquesi Sheppard LLC. Contact us today to get the best tax results.