Don't overlook the tax deductions if you use vehicles in your business, and you probably do. They can be substantial. But the rules can be complex, and you have several choices about which way to go. Should you use the standard IRS mileage rate or actual expenses to determine your expense deduction? Who owns the vehicle? The business, the owner or the employee? And, finally, should you buy or lease the vehicle?
These are all issues that must be examined to maximize your tax-deductible expenses in your particular situation. Let's take a look at each one.
Are Business Vehicle Expenses Deductible?
The IRS lets you deduct the expenses of operating a vehicle when you use it in your business. But you're only allowed to deduct the cost that's related to business use if you use the vehicle for both personal and business reasons.
You can't deduct the miles you drive from home to work and back again. But you can deduct the cost of going from your place of business to visit a customer, to go to the bank or to meet with your accountant. These all contribute to your business mileage.
The IRS allows you to use either the standard mileage rate or actual expenses to calculate the amount of the deduction. As a general rule, you would use the standard mileage rate deduction if you operate a smaller, economical vehicle that gets high gas mileage with low operating costs. But the actual cost method will probably give you a higher deduction if you have a vehicle with higher operating costs, such as low gas mileage and expensive tires.
Standard Mileage Deduction Method
For simplicity, the IRS establishes a standard mileage rate each year that can be used to calculate the deduction for business-related use of a vehicle. The standard mileage rate for tax year 2022 is 58.5 cents per mile. This is up from 56 cents per mile for tax year 2021.
The IRS has the following conditions to use the standard mileage rate. You cannot:
- Operate five are more cars at the same time, as with a fleet of vehicles
- Use a depreciation method other than straight-line.
- Claim a Section 179 deduction.
- Claim a special depreciation allowance.
If you drove your car 15,000 miles last year (2021) for business purposes, your deduction would be:
15,000 miles x $0.56/mile = $8,400
The IRS will let you switch to the actual expenses method in the second and successive years if you find that the actual expense method will give you a higher deduction. You don't have this option if you start out using the actual expense method in the first year.
Actual Expenses Method
You must keep records of all expenses for a vehicle if you're going to use the actual expenses method. Deductions include expenses paid for:
- Oil changes
- Repairs and maintenance
- Replacement of tires
- Washing the vehicles
- Depreciation, if you own the vehicle, not lease
- Registration fees, titles and licenses
- Parking fees and tolls
- Rent for garages
- Interest on vehicle loan
- Lease payments
The amount of expenses that you're able to deduct is based on the percentage that your vehicle is used for business purposes. Suppose the total actual expenses to operate your vehicle for the year were $8,000. You drove the vehicle for 20,000 miles, of which 15,000 miles were for business purposes and the remainder were for personal use.
The percentage that the vehicle was used for business purposes is 75% (14,600/20,000 X 100). Your deduction would be 75% x $8,000 or $6,000.
The deduction using the standard mileage rate for 15,000 business-related miles, $8,400, is higher than the deduction calculated using actual expenses, $6,000. You would be best off choosing the standard mileage rate deduction method in this case.
The actual expenses method will probably give you a larger deduction if you own a larger, more expensive car or SUV. The disadvantage is that you have to keep detailed records of every single expense.
The actual expense method will be preferable if you don't drive a lot of business miles. Higher business miles will tend to favor the standard mileage rate method.
Read more: Can I Deduct Rental Car Costs?
The IRS requires that you keep detailed records of all business-related trips. You'll have to present this information if you're ever audited:
- Date of the trip
- Purpose of the trip
You'll need these documents to support your deductions:
- Canceled checks
- Bills or invoices
The standard mileage rate method includes an allowance for depreciation. But you'll have to calculate the amount to use for depreciation if you're using the actual expense method.
A new vehicle acquired in 2021 is subject to a maximum depreciation deduction of $18,200 in the first year, including bonus depreciation. In the above example in which the vehicle had 75% of its miles used for business purposes, the maximum first-year depreciation for this vehicle would be $13,650 ($18,000 x 75%).
Calculating the deductions for depreciation for the first and following years can get complicated, so it's a good idea to consult your tax advisor to find the best results rather than try to interpret the rules for yourself.
The deduction for business use of vehicles depends on the type of business entity and which tax return you file. Most small-business owners operate as sole proprietors and use Schedule C of Form 1040 to report income and expenses, such as vehicle expenses, from their business.
The deduction must be calculated from actual operating expenses if the vehicle is owned by a corporation. The corporation can deduct all operating expenses in total, but any personal use of the vehicle by an employee would be considered income to the employee.
Deductions for a Leased Car
You can use either the actual expense method or standard mileage rate deduction for leased vehicles. You must stay with the same method over the life of the lease with whichever method you choose. Car expenses are still allocated as a percentage between the mileage for personal use and business use to get the deduction for a business expense.
James Woodruff has been a management consultant to more than 1,000 small businesses. As a senior management consultant and owner, he used his technical expertise to conduct an analysis of a company's operational, financial and business management issues. James has been writing business and finance related topics for work.chron, bizfluent.com, smallbusiness.chron.com and e-commerce websites since 2007. He graduated from Georgia Tech with a Bachelor of Mechanical Engineering and received an MBA from Columbia University.