This post was originally published on Jan. 13, 2015, and was updated for tax year 2016 on Jan. 4, 2017, and for tax year 2018 on Feb. 15, 2019.
Now that you’ve started your business, you’ve heard you can write off auto expenses. So, are you ready to buy that luxury sports car and write off the costs of driving around town to run errands? Well, hold your horsepower. As with most tax-related issues, it’s not that simple.
What you need to know about writing off auto expenses
There are a few things you need to keep in mind before you start writing off the mileage to pick up your dry cleaning.
Separate business mileage from personal mileage
The first thing you’ll need to do is divide up your mileage between business and personal purposes. You cannot deduct expenses related to personal mileage. So attempting to write off that trip to the dry cleaners goes right out the window.
Pick the Standard Mileage Rate or Actual Expense method
Next, you’ve got to determine the method you’ll use to determine the amount of your deduction. Your options are the Standard Mileage Rate Method or the Actual Expense Method.
As Stephen Fishman notes in a MileIQ article, “Most people use the standard mileage rate because it’s easier and simpler. All you do is keep track of your business mileage and deduct a set amount for each business mile. The actual expense method is more complicated and time-consuming. In addition to tracking your mileage, you must also keep track of what you spend on gas and other car expenses.”
MileIQ — available in Microsoft Office 365 from GoDaddy makes it a snap to track mileage on your phone, organize business drives, and report tax deductions.
If you qualify to use both methods, you may want to figure your deduction both ways before choosing a method to see which one gives you a larger deduction. Let’s take a look at the difference between the two methods.
Option 1: Standard Mileage Rate
With either method, you have to keep track of your mileage. Apps like MileIQ make tracking your miles easy, but even if you want to do it manually, you want to make sure you record:
- the date of the trip
- the name of the client
- how many miles you drove to meet or get work done for the client
Here’s how you calculate your deduction with the Standard Mileage method:
Take the total number of business miles you drove during the year and multiply that by that year’s mileage rate (determined by the IRS). The current standard mileage rate is 54.5 cents per mile. Don’t memorize that amount, though – mileage rates change from time to time, often annually.
For example: 25,000 miles x 54.5 cents per mile = $13,600 annual deduction
Take the amount calculated in the previous step, and add that to the business-related interest on the car loan, state and local property taxes, tolls and parking you incurred during the year.
Option 2: Actual Expense Method
In the Actual Expense Method, you can deduct the actual amounts you spent related to the business mileage you traveled. Here are the types of expenses you can deduct:
- gas and oil
- repairs, maintenance, and tires
- lease and rental fees
- car washes (There are some restrictions for paying your child to do this, but that is a subject for another post.)
- the cost to keep your vehicle in a garage
- parking fees
- license and registration fees
- insurance premiums
Here’s how you calculate your deduction with the Actual Expense Method:
Once you’ve tallied the total amount of expenses spent on your vehicle, determine the number of business miles driven during the year.
Divide the total amount of vehicle expenses by the total number of miles driven for the vehicle during the year.
For example: $10,000 in vehicle expenses / 25,000 miles driven in 2018 = .40
Take that percentage and multiply it by the actual amount of expenses incurred during the year.
For example: $10,000 in vehicle expenses x .40 = $4,000
Pretty simple, huh? Well, there are some other considerations. For instance, no matter which method you select, you can also deduct the business portion of the interest on the car loan, state and local property taxes, parking fees and tolls.
Related: Calculating self-employment taxes
Leasing a vehicle
That’s all well and good if you own the car or truck, but what about leasing a vehicle?
You can deduct the portion of each lease payment that is for the use of the car for business- or work-related matters. However, the portion of the lease payment that is used for commuting or for personal use is not deductible.
Additionally, you may have to make advance payments as a part of your lease agreement. These advance payments must be allocated over the entire period, so you only get to deduct the portion of the advance payment related to the current year.
Can you deduct your commute?
OK, let’s say you have a regular job and not a business. Can you deduct costs for traveling from your home to your job and back? Unfortunately, no. However, there are exceptions.
For instance, if you have a temporary work location outside the metropolitan area where you live, the expenses to that location are deductible. Note the term “outside” — you can’t deduct your expenses if the travel is within your city or town.
Your daily transportation costs can be deducted if:
- You have one or more places away from your home where you regularly work.
- Your home is your principal place of business and you go between there and another location of your business, say a branch office or another store, on a regular basis, even if the work is temporary and regardless of the distance.
Also, if you have a part-time job, you cannot deduct travel expenses from your home to that job.
What if you slap a sign for your own business on your car, and, if you’re employed, drive it to your employer’s office? Can you deduct your mileage now because you’re advertising a business? Nope, you’re still commuting. (However, you might be able to deduct the cost of the sign as an advertising expense.)
Auto-related deductions can save you quite a big chunk on your taxes, but you have to take care that you’re following the rules. Don’t be afraid to ask an accountant for guidance on taking the deduction for auto expenses.
The above content should not be construed as legal or tax advice. Always consult an attorney or tax professional regarding your specific legal or tax situation.