What you need to know about writing off auto expenses

Taxes for wheels

** UPDATED FOR TAX YEAR 2016: The standard mileage rate is 54 cents per mile. 

Now that you’ve started your business, you’ve heard you can write off automobile 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 tax-related issues, it’s not that simple.

There are a few things you need to keep in mind before you start writing off the mileage to pick up your dry cleaning.

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. 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, based on AAA research about driving costs:

“As a rule, you’ll be better off using the standard mileage rate if you drive a smaller car, particularly if you drive many business miles. You’re particularly likely to benefit from using the standard mileage rate if you drive an old or inexpensive car. Why? Because you get the same fixed deduction rate no matter how much the car is worth. Twenty-three cents of the 56 cent rate is for depreciation in 2014. With an inexpensive car, you benefit from using the standard mileage rate because the car’s actual depreciation will be less than the 23-cent fixed amount.

On the other hand, the actual expense method will likely provide a larger deduction if you drive a larger more expensive car or an SUV or Minivan. The fewer business miles you drive, the better off you’ll be with the actual expense method.”

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 Milebug 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:

  1.   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 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 cents per mile = $13,500 annual deduction

  1.   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.)
  • cost to keep your vehicle in a garage
  • tolls
  • parking fees
  • license and registration fees
  • insurance premiums
  • depreciation

Here’s how you calculate your deduction with the Actual Expense Method:

  1.  Once you’ve tallied the total amount of expenses spent on your vehicle, determine the number of business miles driven during the year.
  2.  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 2016 = .40

  1.  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.

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 cost of the lease, with some restrictions. 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:

  1.   You have one or more places away from your home where you regularly work; or
  2.   Your home is your principle 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 may 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 automobile 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.

 


Also published on Medium.

Image by: jeffcutler via Compfight cc

Chris Peden
Chris Peden, CPA, CMA, CFM has spent more than 15 years in the corporate world helping companies meet their regulatory compliance requirements. He also assists small business owners with organizing and making sense of their finance information.