Business Related Car Expenses
If you're self-employed and you use your car for your business, it’s possible to deduct some business-related car expenses.
Here are the two options for claiming this type of deduction:
Actual Expenses – for this method, you need to figure out the actual costs of using the car for business purposes. You can then deduct that business-related portion of costs, such as gas, oil, repairs, tires, insurance, registration fees, licenses, and depreciation/lease payments.
Standard Mileage Rate – for this method, you multiply 58.5 cents (the current 2022 rate) by the number of business miles traveled during the year.
Note: Car expenses such as parking fees and tolls that are business-related are deducted separately for either method you choose.
Which method is better for you?
For some taxpayers, using the standard mileage rate calculates to a higher deduction. For others the actual expenses provide a greater deduction. You may use either of these methods, whether you own or lease your car.
If you are using a car you already own, you must choose the Standard Mileage Rate the first year the car is used for your business. For the following years, you can choose to use the Standard Mileage Rate or Actual Expenses.
If you lease a car for business use and choose the Standard Mileage Rate, you must continue to use the Standard Mileage Rate method for the entire lease period of the vehicle, including renewals.
Choosing for the Standard Mileage Rate method allows you to bypass certain limits and restrictions and is simpler; however, it often calculates out to a lower deduction amount. Generally, the Standard Mileage Rate method is best for those who have less expensive cars or who drive a lot of miles for business.
The Standard Mileage Rate may understate your costs, especially if you use the car 100% of the time, or close to it, for business purposes.
Whichever method you choose, tax law requires that you keep travel expense records and that you show business versus personal use on your tax return. Also, if you don't keep track of the number of miles you drive and the total amount you spent on the car, your tax advisor won't be able to determine which of the two options is better for you at tax time. It is essential to keep careful records and receipts (if you use the Actual Expenses method) of your travel expenses and record your mileage.
You can use a mileage logbook or an app on your phone or tablet. There are many apps are available to help you keep track of your business expenses that include mileage and billable time. These apps also allow you to create formatted reports that are easy to share with your CPA, EA, or tax preparer.
Tip: To simplify your record-keeping, consider using a separate credit card for business.
Questions? Give us a call to find out which deduction method is best for your situation.