Can I Deduct That? Auto Expenses & Mileage

Welcome to the first installment of Timber's #canIdeductthat series aimed at helping small business owners with their taxes.

You may drive your personal vehicle to a client’s office, project site, or attend an event. Can you deduct those costs? Travel is covered in more detail later in the series, but if you’re using your personal vehicle for business, here’s what you need to know if you're self-employed.

Two Options:  Standard & Actual

There are two ways to deduct your business expenses associated with your vehicle. One is using the Standard Mileage rate, and the second is using the Actual Expenses. Both require you to track your business and personal miles for the year by vehicle. Remember, commuting is not considered business miles. Logging your miles is the most important component of either deduction. Use a notebook that you leave on your dashboard, or consider MileIQ or Expensify’s mile tracker. It doesn’t matter how you do it, but having the records will be necessary if you are audited. We recommend calculating both to choose the one that is most beneficial for you.

Standard Mileage Rate

The standard mileage rate usually changes each year. It’s set by the IRS and is supposed to take into account a realistic cost of using a vehicle, including depreciation. This is based on averages and indexes but is the quickest and easiest way to track and report your allowable business deduction for miles. All you have to do is take the standard rate and multiply it by your documented business miles. There’s your deduction.

Actual Expenses

The actual deduction gets more complicated. You need to track all of the expenses associated with operating your vehicle. This includes gas, insurance, interest and potentially principal on a loan or lease payments, oil changes and other repairs and maintenance. The key here is keeping detailed records all in one place. It’s best to pay for these all from your personal account, and bring over the related business expenses at year end based on what’s allowable. Once you have these expenses tallied up, you need to use that mileage log to apply the business mile ratio to the expenses. So, if you drove 10,000 miles in a year and half of them were for business, then 50% of all your auto your expenses would be deductible. You’d then compare this amount with the standard method and use the best one. Once you use actual, you can’t go back. This is important as later on, you may prefer the simpler, and potentially more beneficial method, but won’t be able to. If you start with standard, in subsequent years, you can use actual if it’s more optimal.

Depreciation

Depreciation is another beast. If you know you’ll use your vehicle for more than 50% business indefinitely, it can be a great way to reduce your taxes. If you are unsure, it’s probably not worth the calculation and potential "recapture" (owe tax in later years) if your business use goes below 50%.

 

To summarize, you are entitled to a legitimate deduction for the business use of your personal auto. Be sure to track your miles and expenses. This is the first of a #canIdeductthat series. If you have a question or suggestion for an article, email us at luke@timbertax.co!