There are many details business owners need to consider when it comes to vehicle deductions, which can make it a bit overwhelming. What are qualifying activities to deduct vehicle use? Should you buy or lease your vehicle? Should you deduct the standard mileage rate or actual expenses? Your tax deductions can depend on your answers.
Qualifying Business Vehicle Use
Whether you own a vehicle, lease a vehicle, take the standard mileage rate, or deduct the actual expenses, it is absolutely imperative that you keep good records. Generally, if you are using a vehicle for more than one purpose, you need to allocate its use based upon the mileage driven during the year. Therefore, knowing how many miles you drove in the year, including how many of those miles were commuting miles, business miles, and personal miles, can go a long way in determining the business vehicle use deduction you can receive.
How are business, personal, and commuting miles classified? Personal mileage is the distance you drive in a vehicle that does not relate to your business whatsoever. If you are driving your child to soccer practice, going out for groceries, or driving to dinner with the family, then all that driving would be considered personal miles.
Commuting miles are the miles you drive to and from work on a normal business day. The IRS will not give you a deduction because you decided to live 40 miles from your place of employment. Those 80 miles round trip, every day do not count as business miles. Instead, they are considered commuting miles.
Finally, qualified business use, or business miles, relates to the non-commuting miles your personal or business vehicle is used for work. If you have a second work location, then the miles driven between locations on the same day may be considered business miles rather than commuting miles. For example, a physician treating patients both in an office and in a hospital may deduct the cost of travel between the office and hospital. Similarly, if you commute ten miles to work on a regular basis, but have a client meeting five miles from your regular work place on a certain day, then those extra five miles to and from your work would also be considered business miles. If you spend all day driving from client to client, then those miles would also qualify. Keep in mind if, between jobs, you decide to drive out of your way to do a quick grocery run or chore, then those extra detour miles do not count as business miles.
If you run your business from a home office, you may deduct any miles you drive to a client site. The idea here is that normally your commute mileage is zero, so any miles you drive in the day for work would be considered business miles.
Sometimes situations might not be quite so cut and dry. In those instances, make sure you document the mileage in question and then bring your questions to an Aronson tax professional.
Purchased vs. Leased Vehicle
Business use vehicles may be owned or leased. There are different tax and financial benefits to consider in making the lease/buy decision, which are explained further in the blog, “Should You Lease Or Buy Your Next Automobile?” The ability to deduct actual lease costs versus the IRS allowable depreciation expense, however, may impact the decision on whether to use the standard mileage rate or deduct actual expenses for your business miles.
Standard Mileage Rate vs. Actual Expenses
There are two options available to a business owner when it comes to deducting vehicle expenses: the standard mileage rate and actual expenses. One might assume that deducting your actual expenses leads to a bigger deduction. But, in reality, the standard mileage rate offers some great benefits for taxpayers. Please note that you must choose one method or the other and in some cases you may not be able to change your deduction from year to year. For instance, you cannot deduct both the cost of leasing a vehicle and the mileage rate. Once you have deducted actual expenses for a leased vehicle you may not switch to the mileage method in a subsequent year or vice versa. You are locked into the method you choose in the first year, so choose carefully. There is more flexibility with a vehicle you own, but if you’ve ever taken depreciation expense—other than by the straight line method, on an owned vehicle—you may not switch to the mileage method in a later year.
For 2018, the IRS standard mileage rate is 54.5 cents per mile. The rate means that for every business mile you drive, you can deduct 54.5 cents. For example, if you drive 6,000 business miles in a year, then you could receive a deduction of $3,270 (.545 x 6,000). This is a great option for taxpayers who keep track of their mileage, drive many miles throughout the year, and have minimal repairs on the vehicle. If you want the option to use the standard mileage rate for a car you own, you must choose to use it in the first year your car is available for business use. You may be able to change to the actual expense method in later years, which can be beneficial.
If you have an older vehicle that you own and use in your business, you may find that the actual expenses deduction works better for you than the mileage method. For example, an older vehicle used for 2,000 business miles in a year could be eligible for a $1,090 standard mileage deduction, but you may spend $1,500 on repairs to keep it running. Taking the actual expenses would increase your tax savings over the standard mileage rate. Keep in mind that expenses must be allocated between business, commuting, and personal miles. In the situation above, if the vehicle was driven a total of 4,000 miles per year with total expenses of $1,500, the mileage method would be more beneficial. Since only half of the miles driven were for business, only half of the $1,500 in expenses ($750) would be deductible. Deductible expenses include gas, oil, repairs, regular maintenance, insurance, taxes, garage rent, and registration fees.
Every situation differs, but the key to getting the maximum possible deduction is to keep good records. All the little trips to the gas station can add up. By keeping track of these various expenses, as well as a detailed breakdown of your vehicle’s mileage by personal vs. business use, your tax professional will be able to optimize the best deduction for you and your business.
For more information or questions on vehicle deductions, please contact Aristidis Sirinakis, Ellen Boulle-Lauria, or one of our tax advisors at 301.231.6200.