Owning and operating a car can rack up quite a few expenses. For business owners, some of those costs are tax deductible. Determining which expenses are business-related and keeping accurate financial records is essential for maximizing your tax benefits and ensuring tax law compliance.
If your car is exclusively for business use, you may deduct the entire cost of ownership and operation. However, if you use the vehicle for both business and personal purposes, as many people do, you may deduct only the cost of its business use based on the ratio of business miles to total miles driven for the year, and the usage must be documented to substantiate the expense. The easiest way to do this is with a travel log or diary, keeping track of the ‘who, what, when, where, and why’ for the expense.
There are two options for a business vehicle tax deduction: the standard mileage rate and the actual expense method.
Standard Mileage Rate
To use the standard mileage rate method in any tax year, business owners must choose this option for the first year the car is used for business purposes. If a business owner opts for the actual expense method in that first year, the standard mileage rate method cannot be used moving forward. In later years, you may choose between the standard mileage rate or actual expenses, so long as the standard mileage rate was used in the first year. This rule does not apply to leased cars. If you lease the car, you must use the standard mileage rate method for the entire lease period, including lease renewals, if you use it in the first year.
Using the standard mileage rate allows you to seek a tax deduction for every qualified business mile driven. For 2023 usage, you can claim 65.5 cents per mile. In 2024, the rate increased to 67 cents per mile. The IRS updates the standard mileage rates each year. Current and past rates can be found here.
To deduct the miles, the car must be driven for business purposes, including trips from your office to meet clients, visits to the bank or post office, shopping for office supplies, traveling to meet with your accountant or attorney, or driving to and from your main office location and other office locations. The commute to and from home to your office does not count unless your home is your main office location. Tolls and parking fees, interest on a car loan, and personal property tax paid for the car can also be claimed with the standard mileage rate.
Always track or log your miles and keep written evidence for proper record-keeping. Include details such as the number of miles per trip, where you went, the date, and the specific business purpose. Additionally, you must also record the total miles driven throughout the year.
Actual Expense Method
With the actual expense method, you can deduct a percentage of the total amount you spend on your car. To do so, determine the actual costs associated with operating the vehicle for the portion of its overall use dedicated to business purposes, which again is based on the ratio of business miles to total miles driven for the year.
Include expenses such as gas and oil, repair and maintenance costs, tires, car insurance, loan interest, garage rent, registration fees, licenses, and depreciation (or lease payments) attributable to the portion of the total miles driven that are business miles. Then, add up the expenses from this list to calculate the deduction.
In addition, when using the actual expense method, the cost basis of the vehicle can be depreciated as an additional tax deduction.
How to Deduct Your Car Expenses
Self-employed individuals use Schedule C of Form 1040 to claim business car deductions on their tax returns, while partners and members of multi-member LLCs can deduct qualifying unreimbursed partnership expenses using Schedule E of Form 1040.
Final Thoughts
There are a few things to keep in mind as you begin the process of deducting your auto expenses. Again, deductions can never be taken for tax purposes relating to personal use of vehicles. Many small business owners use the same vehicles for both business and personal use. Remember that commuting is not deductible.
You also cannot claim your car as a deduction if you use five or more cars. That is considered a fleet operation, which has its own set of tax rules with the IRS. If you’re an employee rather than a business owner, you’re not eligible to claim any business vehicle write-off on your federal taxes, even if you don’t receive full reimbursement at the standard mileage rate.
Each deduction method has advantages and disadvantages and can lead to different outcomes. To determine which method is most appropriate for you, or if you have questions about the automobile deduction, consult with the tax and finance experts at RDG+Partners at (585) 673-2600.