One of the areas most ripe for business deductions is work-related travel. This article details the travel deductions available related to business use of vehicles. If you use a vehicle for business, including, in certain instances, rental activity, you may qualify for tax deductions related to the vehicle. Specifically, you can take a deduction related to vehicle usage in the following instances:
There are two basic methods to claim a vehicle-related deduction on your tax return: the standard mileage rate method and the actual expense method.
According to the actual expense method, you may also deduct all or a portion of the purchase price of the vehicle through depreciation. The overall business use percentage must be applied to the depreciation deduction, so taxpayers may be surprised that the depreciation deduction does not always yield as substantial a benefit as expected. Be mindful that the tax law includes numerous limitations and requirements with respect to vehicle-related deprecation. For example, if a vehicle is used 50% or less for business, depreciation must be computed ratably over five years rather than using an accelerated depreciation method. Additionally, there are various limitations on the amount of depreciation claimed per year for passenger vehicles depending on the vehicle’s size and weight.
For both methods, you will need to keep a daily record of total and business mileage for the year including the destination and purpose (business or personal). You can keep a manual log in the vehicle, a spreadsheet, or use an app to document miles driven. Another common best practice is to take a picture of the odometer on January 1st to document starting mileage for the year.
If you want to keep it simple, the standard mileage rate method is for you. If you are a dedicated receipt-keeper, the actual expense method might provide a bigger tax deduction, depending on your business use and type of vehicle. If you cannot decide which method to use, you can switch methods each year with some exceptions. Also, each time you buy a vehicle, you can choose a method to use.
For taxpayers with a more energy-efficient and reliable car, the standard mileage rate may yield better results. Also, if a taxpayer expects to keep the vehicle for well beyond five years and put fairly high mileage on the vehicle each year, the standard mileage rate could result in more deductions over the long term.
If you expect the operating costs to be fairly high (maintenance, tires, repairs, etc.), the actual expenses method may help recuperate some of those costs. Due to depreciation deductions, taxpayers using more expensive cars, trucks, SUVs, and minivans may also want to choose the actual expense method.
There are a few caveats to remember when choosing a method:
P&N tax advisors are available to help you maximize your tax deductions. If you have questions about deducting vehicle expenses, contact us today.