Deducting Business Related Vehicle Expenses

If you’re a self-employed individual who utilizes their vehicle for business purposes, there are certain vehicle expenses that can be deducted. The extent of your deduction will depend on factors such as the operating costs of the vehicle, the amount of mileage accrued for business purposes, and the overall percentage of business use.

Available Options for Claiming Deductions

1. Actual Expenses: With this method, you will determine and deduct the actual costs associated with operating your vehicle for business use. This includes expenses related to gas, oil, repairs, tires, insurance, registration fees, licenses, and depreciation (or lease payments).
2. Standard Mileage Rate: For this option, you simply multiply 65.5 cents by the total number of miles driven for business purposes throughout the year. Regardless of the method chosen, any parking fees or tolls directly tied to business usage can be deducted separately.

Determining the Best Method

Determining the best method for calculating your vehicle expenses can make a significant impact on your tax deductions. The choice between using the standard mileage rate or deducting actual expenses depends on various factors. Whether you own or lease your car, both methods are available to you.

For owned vehicles, it is important to note that you must select the standard mileage rate in the first year of business use. In subsequent years, you have the flexibility to choose either method. On the other hand, if you lease a car for business purposes and opt for the standard mileage rate, you must continue using this method throughout the entire lease period.

Simplifying Your Filing Process

Selecting the standard mileage rate simplifies your tax filing process and may provide certain advantages by bypassing specific limitations and restrictions. Generally, those with less expensive vehicles or individuals who accumulate significant business miles tend to benefit more from this method.

Required Documentation

To comply with tax regulations, proper documentation is required. You need to maintain accurate records of travel expenses and distinguish between personal and business use on your tax return. Failing to track your mileage and total vehicle expenditures could result in an inability to determine which deduction option is more advantageous for you at tax time. If you choose to deduct actual expenses, it is essential to retain all receipts as supporting evidence.

Tracking Mileage

For tracking mileage, there are multiple options available.  One can use a mileage logbook or, if you are more technologically inclined, you could use a software application on your phone or tablet.  Several phone apps are available to help you track your business expenses, including mileage and billable time. These mileage apps also allow you to create formatted reports that will help your CPA, EA, or tax preparer come filing time.

Conclusion

Carefully recording travel expenses while maintaining proper documentation helps maximize deductions and ensures adherence to tax laws when choosing an appropriate expense deduction method.  By understanding these guidelines and diligently maintaining comprehensive records of your travel expenses and mileage, you can make an informed decision regarding which method is most beneficial for minimizing your tax liability.