Using a car in your business means tax deductible expenses. But what are the rules? How much can you deduct? What records should you keep?
Here are some answers to those questions. As usual, it’s a bit more complex than the amount of information that fits into this space. See more details and information links at the IRS website www.irs.gov/taxtopics/tc510.html.
The Rules – The entire cost of operating a car or other vehicle used only for business purposes can be deductible, subject to some limits. However, if the car is used for both business and personal purposes, only the portion of the cost used for business can be deducted. More about figuring that out under “Recordkeeping.”
How Much – Two methods can be used: the Standard Mileage Rate Method or the Actual Expense Method. Calculate the deduction both ways and choose the method that gives you a larger deduction. You can switch between methods if the car is owned. If it’s leased, the method must be selected in the first year and used for the rest of the lease period.
- The Standard Mileage Rate can be taken for owned or leased cars not part of a vehicle fleet operation (e.g., five or more vehicles). The Standard Rate is determined annually by the IRS, based on average operating costs including depreciation. The Standard Rate is $.53 per mile for business use in 2017.
- Actual Expenses can be deducted by tracking what it actually costs to operate the car, multiplied by the percentage of the business use of the car. Operating expenses include gas, maintenance, repairs, insurance, registration fees, licenses, lease payments, and depreciation.
Expenses for parking fees and tolls attributable to business use are deducted separately, whether you use the Standard Mileage Rate Method or Actual Expense Method.
Recordkeeping – All business expenses must be substantiated by adequate records or evidence. Payment for many car expenses is evidenced by a receipt or invoice, just like any other expense item. However, there’s only one way to substantiate the business and personal use of the car – tracking the mileage. No matter which method you use, track those miles using an app or a log book.
Sure, deducting the business use of a car on your taxes takes some effort and planning. But once you see how those deductions can add up – at $.53 a mile – you’ll see that time pay off in tax savings.