It’s fairly common knowledge that some auto expenses can be used as tax write-offs, but today we’re giving you some of the common questions we hear about auto expenses and the finer points that go with them so you can make sure you’re making smart choices for you and your small business.
Question: Which is better – standard mileage rate or actual expenses incurred for your deduction on a vehicle used for business?
Answer: It really just comes down to the numbers.
Our standard rule of thumb – if the vehicle is smaller and has lower operating costs and maintenance expenses, it’s safe to say that the standard mileage rate is the better choice. If you’re driving larger vehicles, with higher gas mileage and expenses you’re more than likely better off with the actual expenses incurred method.
The numbers you’ll need to determine the number of miles driven for your business:
- Total number of miles driven during the year
- Total number of miles driven just for business
Question: Ownership – should the business, business owner or the employee have ownership of the vehicle?
Answer: One of the simplest ways to manage ownership is to simply have the employee own the vehicle and then have the employer reimburse for business expenses. This is great for sole-proprietorships and the IRS is fairly fussy about write-offs on business vehicles so it’s important to follow the rules for your business type and keep detailed logs.
Typically, when the vehicle is employee-owned, the business reimburses for business mileage incurred at the standard mileage rate. The amount received for documented business miles isn’t taxable to the employee and the vehicle expenses are therefore deducted by the employer. If you’re a single-member LLC and file a Schedule C with your personal tax return, you’re considered self-employed for tax purposes.
Make sure to ask your accountant, or read up on the IRS requirements, if you’re looking to purchase vehicles that will be owned by the company or business owner or manage a fleet of cars for a business that provides them to employees.
Question: Does it matter what type of car it is?
Answer: You bet. Congress decided quite a few years ago that taxpayers should not be able to subsidize extravagant vehicles used by business. So what type of car is acceptable?
- business vehicles are cars, SUVs and pickup trucks that are used for business activities
Things that don’t qualify:
- vehicles used as equipment such as dump trucks
- vehicles used for hire such as airport transports, limos, and taxis
Question: I’m new to the business vehicle concept, what do I absolutely have to know?
Answer: Glad you asked. Here’s what we tell all our clients no matter the details of their particular situation.
- keep detailed records – the IRS is fussy about auto write-offs, so you’ll want to track mileage and expenses meticulously and keep the records for the appropriate amount of time
- if you drive a lot for business, you’ll more than likely want to use the standard mileage rate to figure your deduction
- business use is a legitimate deduction and should be claimed by the taxpayer – don’t miss out on this opportunity just because it seems scary or confusing!
- if you have questions, read up on the IRS website, ask your accountant or someone that consults small business
Question: How do I know which miles I should track for business?
Answer: If you’re asking this question, you’re probably already tracking and have realized that “business miles” might be trickier than you thought. Don’t worry.
To begin, write down your odometer reading on the day you start using a vehicle for business and on the day the year ends. Business miles are those actually drive for business reasons – to visit a customer, meet a client, pick up supplies, etc. Miles driven to the bank, office supply store, computer repair shop, or to meet with your accountant or attorney (if it’s for your business of course) can also count as part of your mileage deduction.
Some driving might seem business related but isn’t a viable tax write-off:
- Commuting to and from work from your residence isn’t deductible on your business or personal return
- if you stop at the store on your way home from a business trip, the remaining miles from the store to your home can’t be included as business miles. If you’re a multi-tasker and try to combine your business and personal errands make sure you know the difference and note it in your log
Question: What are vehicle expenses?
Answer: Here’s our list.
- gas and oil
- general maintenance and repairs on the vehicle
- registration fees and taxes
- vehicle loan interest
- rental or lease agreements
- large rental
- tolls and parking fees
Sometimes questions arise while you’re on the road. We recommend tracking the mileage and expenses and then making a note to ask about these particular items as soon as you can. Once you have your answers you’ll be able to go back and adjust your log as needed and that way you’ll make sure to have accurate records and not miss out on any possible expenses.
What other questions do you have about vehicle expenses? We’d love to hear and answer your questions!
Ben Sutton is the founder of Mazuma USA, an accounting firm providing tax, bookkeeping and payroll services to small businesses. Since founding Mazuma, Ben has established himself as an expert in the small business world. He’s still driven by that same desire to provide accounting help to all small businesses – from photographers, bloggers and creatives to lawyers, doctors, and dentists, everyone needs affordable accounting help. Ben is a Certified Public Accountant, and a member of the American Institute of Certified Public Accountants. But Ben considers his greatest achievement and credential to be his happy wife and four children.