It’s tax season, which means it’s the time of year when everyone is looking for ways to save. If you want to save as much money as possible, it’s important to take advantage of the tax deductions that are available to you. For example, if you use your vehicle for business purposes, you may be eligible for a tax benefit.
The rules regarding how to declare your vehicle as a business vehicle for taxes are complex. However, learning the rules and how they apply to your situation can pay off in a major way when you file your taxes. Here’s everything you should know:
How to Calculate Your Vehicle’s Deduction
There are two different methods you can use to calculate your vehicle’s deduction when preparing your taxes. Your options are:
- Standard Mileage Rate
- Actual Expenses
Standard Mileage Rate
The standard mileage rate is the simplest and most straightforward method of calculating your business vehicle’s deduction. To use this method, you must keep track of how many miles you travel in your vehicle for business purposes throughout the course of the year. Some examples of miles traveled for business purposes include miles driven:
- To visit a current or prospective client.
- To meet with an accountant, lawyer, or another professional regarding business matters.
- To the bank or office supply store.
Some examples of travel that should not be included when calculating your deduction are miles driven:
- To and from work.
- To and from a restaurant on your lunch break.
Once you figure out how many miles you traveled for business purposes, you can calculate your deduction. The standard mileage rate is currently $0.56 per mile. So if you traveled 10,000 miles for business purposes, for example, your deduction would be $5,600 (10,000 miles x $0.56=$5,600).
If you choose this method, you can also deduct other vehicle-related expenses, including interest on your auto loan, registration, parking, and tolls. However, you must be able to prove that the parking and toll expenses were incurred while using your vehicle for business purposes.
Actual Expenses
This method allows you to deduct any expenses that are related to your vehicle. Some examples of expenses you can deduct when using this method include:
- Gas
- Maintenance and repairs
- Registration
- Taxes
- Interest on your auto loan
- Lease payments
- Tolls and parking fees
- Rental car fees
- Insurance
- Tires
- Depreciation
You cannot deduct 100% of these expenses, though. You can only deduct a certain percentage. To calculate the percentage you can deduct, you need to figure out the percentage of use that your vehicle was used for business purposes.
For example, say your gas, maintenance, repairs, interest, and other auto-related expenses totaled $5,000 for the year. You put 20,000 miles on your vehicle over the course of the year. However, only 10,000 miles were traveled for business purposes. This means you used your vehicle for business purposes 50% of the time.
Because your vehicle was only used for business purposes 50% of the time, you can only deduct 50% of your auto-related expenses. So if your total expenses were $5,000, you can deduct $2,500.
It’s much harder to calculate your business vehicle’s tax deduction using the actual expenses method. However, some people are able to save money by choosing this method over the standard mileage rate method, which is why you should consider it when preparing your taxes. You may want to calculate your deduction using both methods to determine which one gives you a larger deduction.
How Will Your Business Vehicle’s Depreciation Affect Your Taxes?
The term “depreciation” refers to the rate at which your vehicle loses its value as it gets older. If you plan on declaring your vehicle as a business vehicle for tax purposes, it’s important to understand how depreciation may affect your deduction.
Depreciation is built into the standard mileage rate formula, so you do not need to figure out how much your vehicle has depreciated if you choose this method. However, if you choose the actual expenses method, you can claim depreciation as an auto-related expense, so you need to know how to calculate it.
Just like other auto-related expenses, you can only claim a certain percentage of your vehicle’s depreciation on your taxes. The percentage you can claim will depend on what percentage of the time your vehicle was used for business purposes.
The IRS has established depreciation limits that you must follow when preparing your taxes. For example, if you purchased a new vehicle in 2021, the maximum amount you are allowed to claim for depreciation on your taxes is $18,200. Make sure you are familiar with these depreciation limits so you don’t accidentally violate these rules.
Which Business Vehicle Tax Deduction Method Should You Choose?
Now you should have a better understanding of the two different methods that can be used to calculate your business vehicle’s tax deduction. There are pros and cons to each of these methods. But ultimately, the method you should choose will come down to who owns the vehicle and your role in the business as follows:
- Self-Employed
- Personal Vehicle Used by Employee
- Company Vehicle Used by Employee
Self-Employed
If you are self-employed and using your vehicle for business purposes, you can decide which method you want to use to calculate your business vehicle’s tax deduction. Some people may be able to deduct more by choosing the standard mileage rate, whereas others may benefit from choosing the actual expenses method. It’s best to work with an accountant to figure out which one will provide a greater tax benefit for you.
It’s important to note that you are considered self-employed if you are the sole member of an LLC and you file a Schedule C along with your personal tax return. If you’re not sure whether you are considered self-employed or not, speak with your accountant.
Personal Vehicle Used by Employee
The rules are a bit different for people who are not self-employed.
For example, say you are an employee of a company and you use your personal vehicle for business purposes. In this case, you are typically required to report the miles you travel for business purposes to your employer.
Then, your employer will reimburse you for these miles using the standard mileage rate. So if you traveled 100 miles in a week for business purposes, your employer would add $56 (100 miles x $0.56= $56) to your next paycheck.
In this situation, you cannot declare your vehicle as a business vehicle for tax purposes since you are already being reimbursed by your employer.
However, if you were not reimbursed for the miles you traveled for business purposes, you can claim these expenses on your personal taxes. You can choose whether you want to use the standard mileage rate or the actual expenses method when calculating this deduction. But remember, this only applies if you were not reimbursed for your mileage by your employer already.
Company Vehicle Used by Employee
The rules are also different for employees who are given a company vehicle to use when traveling for business purposes.
In some cases, a company car that is given to an employee is treated as additional income to the employee. This is because the use of a company vehicle is often classified as a taxable employee benefit.
If you are in this situation, you will not be able to declare your vehicle as a business vehicle for tax purposes. Because the vehicle is classed as a taxable employee benefit, you will need to declare a percentage of the vehicle’s value as income when preparing your taxes. Your accountant can help you with these calculations.
If the vehicle is treated as income to the employee, the company that supplied the vehicle can deduct all auto-related expenses when preparing their taxes. The company does not need to figure out the business-use percentage when calculating this deduction. Instead, the company has the right to deduct 100% of the expenses.
The tax laws regarding the use of a company vehicle are complex. For this reason, many companies prefer reimbursing their employees for using their personal vehicles for business purposes instead.
How to Calculate Your Business Vehicle Deduction for A Leased Vehicle
The rules regarding how you can declare your vehicle as a business vehicle for tax purposes apply regardless of whether you lease or own your vehicle. If you use a leased vehicle for business purposes, you can choose either the standard mileage rate or actual expenses method when calculating your deduction.
However, it’s important to note that once you choose the standard mileage rate method, you must continue to use this method in the future. You cannot switch to the actual expenses method in a later year. Furthermore, if you choose the standard mileage rate, you cannot deduct your lease payment.
If you choose the actual expenses method, you cannot claim depreciation as an auto-related expense. However, you can deduct the business-use percentage of your monthly lease payment.
Keep this information handy when you prepare your taxes so you can maximize your deductions and save money this tax season.