Deducting Your Car through Your Business
The vehicle deduction is a great way for small businesses to save on their taxes. However, most business owners miss out on huge savings by misapplying the vehicle deduction. Below we will explain how you can use the vehicle deduction in your business today.
Option 1: Standard Mileage Deduction
The standard mileage deduction is the simplest and easiest way to deduct your vehicle on your tax return. Below we will outline what you can and cannot deduct if you elect the standard mileage deduction.
What can you Deduct?
Business Miles
You can deduct 58.5 cents for every business mile you drive. So, if you drive 10,000 miles in 2022 related to your business, you will be able to deduct $5,850 on your tax return. You are not allowed to include commuting miles to your office.
Tolls and Parking Fees
All tolls you pay will be deductible with your mileage. This includes prepaid tolls.
Also, you will be able to deduct all parking fees, provided the parking fees are not at your office.
What can't you deduct?
Commuting Miles
Commuting miles are defined as miles you drive from your home to your office. If you drive to an office to perform your work, you will not be able to deduct those miles or parking fees.
If you drive to a client site to perform your work, you can deduct those miles and parking fees.
More than five cars
Suppose you operate more than 5 vehicles in your business. In that case, you will be required to use the actual expense method for each vehicle.
Leasing
Suppose you are leasing a vehicle and elect the standard mileage deduction. In that case, you will not be able to change to the actual expense method for the duration of your lease.
Gas and Repairs
If you use the standard mileage deduction, you are not allowed to deduct gas and repairs through your business.
Section 179 Deduction
If you have claimed the Section 179 deduction on your car, you will not be allowed to use the mileage deduction. Instead, you are required by the IRS to use the actual expense method.
Option 2: Actual Expense method
The actual expense method often leads to higher deductions for most businesses. However, you will only be able to deduct the actual expenses in direct proportion to how often you use your vehicle for business. As a result, you will have to track your business miles, personal miles, and all of your receipts.
What can you deduct?
Depreciation
When using the actual expense method, you must depreciate the cost of your car over a five-year period.
For example, let’s say you purchased a vehicle this year for $40,000 used 50% of the time for business purposes. You will depreciate $20,000 over five years for a deduction of $4,000 each year.
Also, let’s say you purchased a vehicle for $40,000 3 years ago but just started using that car in your business this year. You cannot depreciate the $40,000 cost of the vehicle. Instead, you would depreciate the vehicle based on the vehicle’s fair market value on the date you placed it into service. So let’s say that car is now worth $20,000 and it is used 50% of the time for business purposes. In this case, you will depreciate $10,000 over five years for a deduction of $2,000 each year.
Repairs, Maintenance, Gas, Parking, Tolls, Insurance, Lease Payments
Unlike the mileage method, you can deduct all of these expenses with the actual expense method. But keep in mind, you can only deduct these expenses to the extent that you use your vehicle in your business.
So, if you only use your vehicle in your business 20% of the time, you can only deduct 20% of the above expenses.
What can't you deduct?
Business Miles
If you elect the actual expense method, you will not be able to deduct the business miles you drive with your vehicle. However, you will still need to track your business miles so you can appropriately calculate the proportion of actual expenses you deduct on your tax return.
Option 3: Section 179 Deduction
The section 179 deduction allows you to deduct the vehicle’s entire value in the first year you place the vehicle into service. However, you must use the car for business purposes more than 50% of the time. Additionally, you must use the actual expense method in the years following the section 179 election.
Other Considerations
- If you elected the actual expense method in year one, you are not allowed to switch to the mileage deduction in the future for the same vehicle.
- If you elected the standard mileage deduction, you will be allowed to change to the actual expense deduction in the future.
- You are allowed to use the standard mileage deduction for one vehicle and the actual expense method for a different vehicle.
Conclusion
The vehicle deduction is a great way for small business owners to save money on their taxes. However, every situation is different, so consult with a CPA before preparing your tax return.
At Windstone Financial, our team of CPAs has years of experience helping small businesses minimize their tax burden. Click the button below to learn how we can help you save money.
