Running a business can be expensive. Fortunately, the IRS allows certain expenses to offset your business income. A key source of such deductions is your vehicle business expenses. In what follows, I will sketch an outline of how vehicle deductions work and help you determine the deduction method that is right for you.
First, what counts as business use of a vehicle? Vehicle expenses are those ordinary and necessary expenses paid or incurred during the taxable year in carrying on your business and that are related to your vehicle. Simple, right? Here are a couple examples to clarify:
Commuting to or from your regular place of business are miles that are never deductible. Driving to and from a client’s office for business purposes, however, is business related, as is picking up office supplies or driving to a business conference. These, therefore, are deductible.
As you likely are aware, the vehicle need not be reserved solely for business use to claim its deductions, but you definitely cannot deduct the personal-use portion of the expenses. The easiest way to track personal versus business use is to track your mileage. For example:
You drove the car a total of 100 miles in January, 40 of which were business related. In this case, you could deduct 40% (40 miles / 100 miles) of vehicle expenses for January.
There are two main ways to deduct your vehicle expenses. You can either deduct your actual expenses (gas, oil, repairs, etc.) or you can use the standard mileage rate. Here are some facts to know about each.
Deducting actual expenses is exactly as it sounds—you track all expenses related to your vehicle for the year and deduct the business-use percent on your tax return.
Setting aside depreciation for the moment, if you had $3,000 in gas, $250 in oil changes, and $500 in repairs then, assuming 40% business use, your total vehicle deductions for the year equal $1,500 (40% x ($3,000 + $250 + $500)).
Depreciation complicates matters a bit, but the long and short of it is simply that each year you deduct a certain percent of the vehicle’s original cost to you (reduced by the personal-use portion). The downside is that if you sell the vehicle, any amount the IRS so graciously let you depreciate is now treated as ordinary taxable income to you (so called “depreciation recapture”).
Standard mileage is easy. Again, it’s a matter of tracking total business miles for the year. A mileage logbook (which correlates with your work calendar) is useful here. The standard mileage rate for business purposes is 57.5 cents per mile for 2015 (up from 56 cents in 2014).
If you log 1000 business miles, you deduct $575 in 2015 (1000 miles x $0.575 per mile). (No personal-use reduction here since this is based purely on business miles.)