You may get a tax deduction for your vehicle expenses if you use the vehicle either for your job, in your business, medical-related treatment, charity or moving. If you are a self-employed business owner, business use includes the use of the vehicle by you or any of your employees for business-related reasons. This means that putting branding on your vehicle and using it for personal reasons, such as going to the grocery store, would not count as business use. What’s more, business use may include use related to a rental property. Specifically, you can deduct mileage if you drive your vehicle to and from your rental property for legitimate operational reasons, such as to show the property or tackle repairs. If you are an employee, you can deduct vehicle expenses when you use your personal vehicle for job-related reasons. It is worth noting that the IRS does not consider driving to and from your usual job site as a job-related reason. With that in mind, the IRS uses two methods to calculate vehicle expenses deductions. These methods are standard mileage deduction method and actual auto expenses method.
Standard Mileage Deduction or Claiming Actual Auto Expenses
Whether you use the standard mileage deduction method or the actual auto expenses method, you will need to track your miles. This will not only allow you to know your total miles for the tax year, but also help you separate your business miles from your personal miles. One of the best ways to track your miles is to keep a log. That said, the standard mileage deduction method is the simpler of the two methods because it only requires you to track your mileage for the tax year. Additionally, you would need to use the vehicle available for use in your business in order to use the standard mileage deduction method. What’s more, for a lease vehicle, you would need to apply the standard mileage rate method throughout the entire lease, including renewals.
The actual expenses method, on the other hand, takes into account all the expenses related to the use of your vehicle for business related reasons for the tax year. Examples of such expenses include tires, fuel, parking fees, maintenance, auto insurance, registration fees and depreciation. This means that, if you decide to use the actual expenses method, you would need to track all the individual expense and more importantly, keep a receipt for any expense over $75. To deduct a portion of lease payment or depreciation, at least 50% of the use of the vehicle has to be business or job related. For a lease vehicle, you would need to offset your expenses by an amount the IRS publishes based on the value of the car at the time you leased it.
Self-Employed vs An Employee
If you’re a self-employed business owner, you can only deduct personal property taxes and interest expenses for your business vehicle expenses. On the other hand, if you’re an employee and your employer provides you with a company vehicle suitable for your personal use, your employer would treat part of the value of the vehicle as compensation, meaning you would have to pay income and Social Security taxes on that part of the value.
Whether you’re a self-employed small business owner or an employee, claiming actual auto expenses is one of the best ways to cut your tax bill.