By: Paul Wilkin, CPA
Key Takeaways:
- Business owners can deduct vehicle expenses using either the actual expenses method (tracking all car expenses) or the standard mileage rate (a flat rate per business mile). For 2024, the standard mileage rate is 67 cents per mile.
- Accurate and contemporaneous mileage tracking is crucial for both deduction methods. Technology such as mileage tracking apps can assist, and detailed records of expenses like gas, oil, repairs, and insurance are necessary if using the actual expenses method.
- Only business miles, not commuting miles, are deductible. For business-owned vehicles, at least 50% of the vehicle’s use must be for business to take full advantage of tax benefits. Personal use of company cars must be reported as income.
Detailed Mileage Recordkeeping is Essential
Whether you travel for business or pleasure, driving a car these days is an expensive proposition – and getting more so. But as a business owner, driving a personal vehicle for business purposes brings tax advantages that can significantly defray the costs.
Standard Mileage Rate vs Actual Costs
You can deduct your vehicle expenses in one of two ways:
- Actual expenses method: You may track all your car expenses — including gas, oil, repairs, insurance and depreciation — and deduct the portion of your total car expenses that apply to business miles.
- Standard mileage rate: Using this method, you simply deduct a flat rate for every business mile you drive, which is called the standard mileage deduction. In 2024, the standard mileage rate is 67 cents per mile for business miles.
You should calculate your deduction for taxes both ways to see which method gives you the biggest deduction.
Regardless of which method you use to deduct vehicle expenses, accurately tracking the mileage you rack up for business use is essential, and it must be tracked contemporaneously. Technology can help, as there are several apps now available for mileage tracking.
Additionally, if you use the actual expense method, you must keep detailed records of gas and oil purchases, repairs and insurance, as well as receipts for all.
Also keep in mind that under either method, if there is a loan on the vehicle, the business use percentage of interest paid on that loan is deductible as well.
Be aware that you can only count miles driven for business for tax purposes, not commuting miles. So miles driven back and forth to your regular office – considered commuting miles by the IRS – don’t count. Business purposes might include driving from your office to a client’s office, a temporary work location or an office supply store.
Entering Vehicle Information on Tax Return
If you have a sole proprietorship, enter business mileage and other vehicle expense information on the Schedule C tax form for that business. If you have more than one business, be sure to enter business mileage and expenses with the correct business.
Similarly, if you and your spouse have separate businesses for which you drive the same vehicle, make sure the business miles are tracked separately and attributed to the correct business on your tax returns.
Vehicle Depreciation
If you use a vehicle for both personal and business purposes, you can only deduct the cost of its business use. To depreciate your vehicle, you must:
- Determine the business use of your vehicle by assigning a percentage for the personal and business use of your car, based on mileage.
- Determine the standard mileage deduction or the actual expense method deduction.
- Choose the method with the highest deduction.
- Take the car tax deduction on Form 1040 Schedule C.
What if the Vehicle is Owned by Your Business?
If your business is a corporation or LLC and owns the vehicle, the related tax benefits accrue to the company, not to you. Moreover, to take advantage of the tax benefits, at least 50% of the vehicle’s miles and expenses should be incurred for business use, though it should be closer to 100% in order to take full advantage of the deductions. It’s important to remember that the IRS will not allow Sec. 179 depreciation deductions for vehicles that have less than 50% business use.
For company-owned vehicles, the following tax benefits are allowed:
- Depreciation – A portion of the vehicle is expensed each year for five years on the business tax return.
- Lightweight vehicles – Vehicles that weigh less than 6,000 pounds are eligible for first-year depreciation of up to $10,000. A bonus depreciation election can push that higher, though as bonus depreciation values decline this benefit becomes less valuable.
- Various automotive costs – Vehicle repairs and maintenance, gas, insurance, registration and tolls can be deducted with proper documentation such as mileage records and receipts.
Company-owned vehicles are generally favorable for people who buy expensive cars and don’t put many miles on them. They may also be best for people who purchase new cars relatively frequently (every three to five years) because the depreciation deductions will likely outweigh the deductions available for mileage.
Personal Use of Company Car is Tricky
If you incur any personal miles with a company-owned vehicle, you are required to include in your income an adjustment for the personal use of the vehicle. This can be a significant number for people with expensive vehicles. Even if you just drive the company car home at night and drive it back to the office in the morning, the commuting miles you put on the car are not considered by the IRS to be business miles. It’s best to leave the company car in the company parking lot at night.
If you would like further information about the rules around business use of vehicles, contact your KRD advisor.
