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How to Deduct the Business Use of Your Car
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Business owners can take a tax deduction for the business use of their personal car. Follow the twists and turns of the car tax deduction with these five steps.
If you’re a business owner who hops in your personal car to meet clients or pick up supplies, you should be taking a tax write-off for the business use of your car.
Can you deduct taxes for the business use of your car?
The self-employed can score a business tax deduction for using their personal car for business. Tax deductions reduce your taxable income, lowering your tax bill.
The car tax deduction comes in proportion to the business use of your car. While you can and definitely should deduct a trip to visit a client site, the IRS is not handing out deductions for business owners driving their children to softball practice.
The deduction amount hinges on the vehicle type, purchase price, and its use in the business. There are two methods to calculate the car tax deduction: the actual expense method and the standard mileage rate method.
How to qualify for business car tax deductions
If you can put a check next to these three qualifications, you can deduct the business use of your personal car.
1. You’re self-employed
You must be self-employed to deduct the business use of your car. Before the Tax Cuts and Jobs Act (TCJA), employees could also deduct some unreimbursed business expenses, including business mileage on their personal cars. Now, employees who use their cars for business travel rely on receiving mileage reimbursement from their employers.
I’m going to pick on S corps in this article, but it’s nothing personal. S corp owners who classify as employees can’t take a car tax write-off as a sole proprietor can. Instead, write a reimbursement check from your S corp to your individual bank account for the business use of your personal car. You can use either method when the car’s title is in your name.
2. You or your business leases or owns the car
You can’t deduct a car you don’t own or lease. Make sure the car’s title is in either your name or your business’s name.
Only put a car in your business’s name if you don’t plan to use it for personal reasons, especially if you’re an S corp owner. Driving a business car for personal purposes counts as a taxable fringe benefit, potentially negating the car tax deduction’s benefit.
Further, when the car is in your business’s name, you can only use the actual expense method to deduct car expenses.
3. Business driving is more than commuting
If the extent of your business driving is commuting between home and work, the IRS would argue that you don’t actually use your car for business. A regular commute between home and the office doesn’t qualify as an eligible business trip.
You can only deduct your car’s business use for driving between workplaces, from your office to a client’s office, for example.
However, those who work from a home office can count driving to another workplace as business mileage. Don’t forget to take a home office deduction, too.
How to take a tax deduction for the business use of your car
You can choose between two methods for deducting the business use of your car. You’ll face restrictions if you switch methods, so choose wisely.
1. Determine the business use of your car
Assign a percentage for the personal and business use of your car, based on mileage. To the IRS, commuting goes in the personal mileage bucket.
The best way to track mileage during the year is by using a mileage tracking app, such as Freshbooks Mobile, or taking pictures of your odometer before and after a business trip and recording mileage in a spreadsheet.
For example, Becky Business-Owner drove her leased Honda Civic 40,000 miles last year. She put in 30,000 business miles and 10,000 personal miles. Therefore, her car is used 75% for business and 25% for personal purposes.
2. Determine the standard mileage deduction
The standard mileage deduction formula is:
Standard Mileage Deduction = (Business mileage ✕ IRS standard mileage rate) + Non-Commuting Parking + Tolls
The IRS standard mileage rate changes annually. In 2020, it’s $0.575.
Becky’s standard mileage deduction is $17,250 (30,000 business miles ✕ $0.575 IRS mileage rate). She incurred no parking or toll expenses.
3. Determine the actual expense method deduction
Next, tally the actual expenses of your vehicle for the year. Include these costs:
- Registration fees
- Depreciation or lease payments
- Parking unrelated to commuting
A note on depreciation and lease payments: Deduct depreciation for cars you own, and deduct lease payments for leased vehicles. You can deduct depreciation for cars financed through loans.
Depreciation throws a wrench in what would otherwise be a simple calculation. To calculate your car’s depreciation, consult your tax software or tax professional. What makes depreciation for cars complicated is the overwhelming number of depreciation methods and stipulations.
For example, if the car is used 50% or more for business, you can take an oversized depreciation deduction with the Section 179 deduction or bonus depreciation. Otherwise, depreciate your car using straight-line depreciation in proportion with its business use. Annual depreciation limits for cars depend on your car’s gross vehicle weight rating (GVWR).
Let’s get back to Becky, who leases her car. She incurred these expenses during the year.
|Item||Total Expense||Business Percentage||Deductible Expense|
Becky’s actual expense method deduction comes out to $8,175.
4. Choose the method with the highest deduction
In Becky’s case, she’d go for the standard mileage rate deduction because the $17,250 standard mileage rate method exceeds the $8,175 actual expense method.
If the numbers come out close and you’re unsure which method to use, go for the standard mileage rate. When you start out using the actual expense method, you can’t switch to the mileage rate. Yet, those who own their cars and start with the standard mileage rate can move at any time to the actual expense method.
Lessees can’t change their method for the duration of the lease, so choose carefully.
5. Take the car tax deduction on Form 1040 Schedule C
Sole proprietors enter their car tax deduction on Schedule C. Follow the guide below for reporting your car’s business expenses according to the method you chose.
Report the car tax deduction on Form 1040 Schedule C. Image source: Author
- Can I write off my car payment?
You can write off your leased car payment when you choose the actual expense method. If you finance the car, you can’t write off your monthly loan payment. Instead, take a depreciation deduction for a portion of your car’s value, up to the annual limit. Tax software or a tax professional can help you estimate the depreciation limit for your car.
This sounds like a joke, but it’s not: Depending on your car’s weight, you might qualify for a 100% tax deduction for buying a car when it’s used solely for business. Cars with a GVWR between 6,001 and 13,999 pounds qualify for a 100% bonus depreciation deduction. In other words, buying a Cadillac Escalade for $80,000 is 100% deductible in the year of purchase with bonus depreciation. Most large SUVs qualify for the 100% deduction. Lighter cars don’t qualify for a 100% first-year deduction, but you may deduct a sizable portion of your new car purchase with a Section 179 deduction, with annual limits on car and truck deductions. Talk to a tax advisor before banking on deducting 100% of your car purchase.
When you use the actual expense method, you can deduct repairs on line 9 on Schedule C. Don’t report car repair costs on line 21, “repairs and maintenance.”
There’s vroom to save with a car tax deduction
Deducting the business use of your car as a business owner doesn’t have to be complicated. Keep track of business trips taken in your personal car, and you can get a tax deduction.
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Ryan Lasker is an SMB accounting expert writing for The Ascent and The Motley Fool.
Writing off car expenses for business: Understand your options
Driving and maintaining a vehicle as part of your business can mean added car expenses. Luckily, you can offset those costs by writing off a car as a business expense when you file your taxes.
Maybe you use your truck occasionally for your lawn business? Or perhaps, you exclusively drive your minivan for catering jobs.
In either case, you have two options for a business vehicle tax deduction. You can use either:
- Standard mileage rate
- Actual expense method
Knowing which option to take will depend on your unique situation. The first step is determining whether you qualify.
Business vehicle write off: who qualifies?
The Internal Revenue Service identifies taxpayers who qualify to claim a business vehicle write off as:
- Self-employed individuals. Sole proprietors and owners of limited liability companies (LLCs) with a tax classification that allows pass-through income on Tax Form 1040 qualify for the write off.
- Certain types of employees. Qualified performing artists, reservists in the U.S. armed forces, and fee-basis state or local government officials qualify to claim the business vehicle write off.
- Individuals traveling for volunteer work or medical appointments. These individuals can write off miles only for specific trips if they itemize deductions on Schedule A.
For this post, we’ll focus on the first type mentioned and cover how to write off a car as a business expense.
Note: You can’t claim your car as a deduction if you use five or more cars. That’s considered a fleet. Also, if you are an employee and not the business owner, you can’t claim a business vehicle write-off at all, even if you aren’t fully reimbursed at the standard mileage rate.
Have questions about whether you qualify for the deduction? Talk with a trusted Block Advisors certified small business tax pro to get the answers you need.
Business vehicle tax deduction: standard mileage rate vs. actual expense method
Two options are available for the business vehicle tax deduction: standard mileage rate and actual expense method. To use the standard mileage rate, you must use this method the first year the car is used in a business. Then in later years, you may choose between the actual and standard methods.
Let’s look at these methods to see which one works best for you.
Standard mileage rate
The standard mileage rate lets you claim the business vehicle tax deduction for every qualified business mile you drive.
Self-employed individuals can claim 56 cents per mile in 2021 for miles driven for work. In 2022, the rate increased to 58.5 cents per mile January 1 – June 30 and then again to 62.5 cents per mile July 1 – December 31. Multiple rate hikes in one year are rare, but occasionally do happen.
If you drive frequently for business, the amount can add up. For example, if you drove 8,000 business miles in 2021, you would multiply that number by the business mileage rate. As a self-employed individual, you would have a tax deduction of $4,480.
8,000 miles × $0.56/mile = $4,480
What are business miles?
Business miles include all miles driven for professional purposes, with a few exceptions.
- Driving from your office to meet with clients.
- A trip to the bank, post office, or office supplies store.
- Traveling from the office to meet with your accountant or attorney.
- Driving from your main office location to other office locations.
What doesn’t count:
- You can’t claim the miles you commute to and from the office from your home. But, if your home is your main office location, trips from home do count as mileage.
- You can’t deduct personal use trips or errands.
- Making a work call while in the car does not count as business miles.
You also can claim tolls and parking fees with the standard mileage rate.
You must track your miles as written evidence of your business mileage. Keep a calendar in your car or log the miles on your phone. You should include the number of miles per trip, where you went, the date, and the business purpose.
You also need to record the total miles you drive during the year. Write down your odometer reading on the first day you use your car for business and the last day of your tax year.
Actual expense method
The actual expense method lets you claim a business car deduction for a percentage of the total amount you spend on your car. You simply need to keep track of the amounts you pay for your car throughout the year. What if you use your vehicle for personal and business use — like the example of a truck used occasionally for a lawn care business?
If your personal car sometimes doubles as a work car (for another example, you use it to drive for a rideshare company), you’ll need to calculate the business-use percentage based on the number of miles you drive for work.
Let’s walk through how to write off a vehicle as a business expense. And, if you’re like the lawn care business owner, you can use the same steps to understand how to write off a truck for business!
You can deduct the following expenses:
- Repairs and maintenance
- Gas and oil
- Garage rent
- Car Insurance
- Loan interest
- Registration fees and licenses
- Rental or lease payments
- Tolls and parking
To calculate the deduction, you want to add up the deductible car expenses from the list above. Let’s say you paid $1,800 in repairs, $1,600 in gas, $600 for insurance, $450 for tires, and $50 for tolls and parking for your car. That comes to $4,500 in actual expenses.
$1,800 + $1,600 + $450 + $600 + $50 = $4,500
Next, figure the percentage of business use of the car. This amount is calculated based on the number of business miles on the car and the number of total miles. (See the standard mileage rate information above to understand what you can claim as business miles.) Let’s say you drove your car 8,000 miles for business, and your total mileage on the car was 10,000. The business use percentage would be 80%.
8,000 / 10,000 = 0.8
Now, multiply the actual expenses times the percentage to get the deduction of $3,600.
Another expense you may be able to include in the actual expense method is depreciation, which represents a set portion of the purchase price of the vehicle.
Should you use the standard mileage rate or the actual expense method?
You can do a simple calculation to determine what would be the best choice. Using the example above, you had 8,000 business miles. To figure the amount using the 2021 standard mileage rate, simply multiply 8,000 miles times a rate of 56 cents per mile. You get a total of $4,480. (This is the rate for self-employed individuals and certain types of employees. Other groups use different rates.)
8,000 miles × $0.56/mile = $4,480
Then, compare the actual expense method calculation of $3,600 with the standard mileage rate of $4,480. This year, the standard mileage rate would be best for the tax deduction. But keep in mind, factoring in depreciation or changing other variables may change which method reduces your tax bill most.
Can I write off a vehicle purchase for business use?
If you claim actual expenses, you may qualify to write off a portion of the purchase price each year. You cannot write off the purchase price in any year you claim a standard mileage rate deduction.
The Section 179 deduction lets you deduct some or all the purchase price of the car in the year you bought it, but with limits. For instance, you must use the car at least 50% of the time for business and you can only deduct the percentage of the car that you use for work.
Bonus depreciation may be available the first year the car is placed in service, but there is a first-year limit.
If you can’t deduct the entire purchase price of the car, you have an option. You can claim depreciation every year for general wear and tear on the car, even if you claimed the Section 179 deduction or a bonus depreciation deduction.
How to write off a car for business use: the forms you’ll need
Here’s a quick rundown of the forms to use to write off a car for business on your tax return:
- Self-employed individuals use Schedule C of Form 1040.
- Partners and members of multi-member LLCs use Schedule E to deduct qualifying unreimbursed partnership expenses.
- Certain types of employees use Form 2106.
- Individuals traveling for volunteer work or medical appointments use Schedule A.
- Everyone uses Schedule A to deduct personal property taxes.
- Those claiming depreciation use Form 4562.
Driving and maintaining a vehicle as part of your business can mean added car expenses. Luckily, you can offset those costs by writing off a car as a business expense when going through your small business tax forms and filing your taxes.
Business car deductions can be complicated. We’re here to help.
Still have questions about how to write off a car, truck, or passenger vehicle as a business expense? Our Block Advisors small business certified tax pros have answers.
We’ll help you determine your deductions and answer your important tax questions so you can get back to running your small business.