Many businesses need the use of a vehicle as part of their daily operations—meeting clients, delivering products, buying supplies, etc. If you use a car for business purposes, you’ll be able to deduct all of its related business expenses. Here’s how to go about it.
How to calculate deductible car expenses
If you use your vehicle solely for business purposes, you can deduct all operating costs associated with the vehicle. If you use your vehicle for both business and personal use, you can only deduct the expenses associated with business use, such as driving to a client’s location, making deliveries, buying business supplies, or any other purposes related to your business operations.
There are two methods you can use to calculate your deductible car expenses:
- Standard mileage rate
- Actual expenses
If you qualify to use either option, you may want to figure out your deduction using both methods and choose the option that gives you a larger deduction.
Standard mileage rate
The IRS provides a standard mileage rate that is updated annually. You can view the current standard mileage rate here or search ‘standard mileage rates’ on IRS.gov.
To qualify to use the standard mileage rate, you must own or lease the car and:
- Operate fewer than five cars at the same time (i.e. a fleet operation will not qualify)
- Not have claimed a depreciation deduction using any method other than straight-line
- Not have claimed a Section 179 deduction
- Not have claimed the special depreciation allowance on the car
- For a car you lease, you must not have claimed actual expenses after 1997
To apply the standard mileage rate for a car you own, you must choose to use this method in the first year that you use the vehicle for your business. In later years, you can choose to use the standard mileage rate or change to using actual expenses. If you lease a vehicle, you must use the standard mileage rate method for the entire lease period if you initially choose the standard mileage rate.
Even if you choose the standard mileage rate deduction, you can still deduct other business expenses, such as:
- Interest on a vehicle loan
- Registration and property tax fees
- Parking and tolls
To use the actual expense method, you must add up all of your car-related expenses for the year and multiply them by the percentage of miles driven for business purposes. Expenses to include:
- Tires and other wear-and-tear items
- Registration fees
- Depreciation (or lease payments)
Are business vehicles assets or expenses?
Business vehicles are assets, but they are assets that are likely to depreciate in value. The Modified Accelerated Cost Recovery System (MACRS) is the depreciation method used to depreciate any car placed in service after 1986. There are some exceptions and limits on how much depreciation you can deduct, which you can find in Topic No. 704. Publication 463, Travel, Entertainment, Gift, and Car Expenses, which explains the depreciation limits and discusses special rules applicable to leased cars.
Remember that bonus depreciation (which allowed businesses to deduct short-term investments in items like equipment and vehicles immediately) has now phased out. Businesses can now only deduct 80% of expenses all at once, with the remaining 20% being spread over several years. Every year, the amount organizations can deduct will be reduced by 20%.
Business vehicle use recordkeeping
The IRS is very particular about writing off the cost of vehicles, and the law requires you to substantiate your expenses by adequate records or by sufficient evidence. For detailed recordkeeping requirements, refer to Topic No. 305.
Our top tips:
- Keep detailed records of all costs associated with the business use of your vehicle
- Keep a detailed log of your mileage and dates you drive for business
- Keep track of all business vehicle use expenses through a cloud-based expense tracking app or other organized system
Take advantage of electric vehicle credits
The Inflation Reduction Act (IRA) includes the Clean Vehicle Credit, which incentivizes purchasing electric vehicles (EVs). The maximum credit available is $7,500, but there are a few criteria to be met, as explained in this blog post about EV tax credits. Another significant change included in the IRA is the removal of the 200,000 vehicle cap. You can now qualify for the Clean Vehicle Credit if you purchase an EV from a manufacturer that has produced more than 200,000 EVs.
Do you have any further questions about claiming business vehicle use?
We always recommend consulting a qualified CPA before claiming a deduction or credit that has detailed qualifying rules and various nuances. We’d be happy to help you work out which method is more beneficial for your circumstances and how to minimize your tax liability. Get in touch to schedule a free consultation.