What you Need to Know About Car Tax Deductions

Are you a business owner or entrepreneur? You may qualify for several car tax deductions. As you know capital crucial for any healthy business and to leave unclaimed money on the table is not smart business. If you use the car for both business and personal reasons you must separate the two and only deduct the miles you’ve tracked for work related travel. Let’s dive a little deeper…

How to Figure out Car Expenses

Now that you know who  can deduct expenses, these are the two methods you’ll want to actually use to figure out expenses. The IRS website says:

There are two methods for figuring car expenses:

1. Using actual expenses
   • These include:
     • Depreciation
     • Lease payments
     • Gas and oil
     • Tires
     • Repairs and tune-ups
     • Insurance
     • Registration fees
        
2. Using the standard mileage rate
   • Taxpayers who want to use the standard mileage rate for a car they own must choose to use this method in the first year the car is available for use in their business.
   • Taxpayers who want to use the standard mileage rate for a car they lease must use it for the entire lease period. 
   • The standard mileage rate for 2018 is 54.5 cents per mile. For 2019, it‘s 58 cents.

Each of these methods has its own recordkeeping requirements. Many choose to use the standard mileage rate as it’s the easier method, but it may be a lower deduction. If instead you use the actual expense method, it requires more individual bookkeeping but may allow for higher deductions. For many, it essentially comes down to whether or not the time and work you put into itemizing is worth it or not.

Using the actual expense method, you deduct the actual costs incurred each year operating your car for work, plus you use the tax code schedule for depreciation and repairs. Your deductible costs include gas and oil, license fees, repairs and maintenance, insurance, and car wash costs. Whether you use the standard mileage rate or the expense method, tolls and parking can also be deducted. 

Something that often gets overlooked is that the method you choose for car deductions in year one of claiming it for business use could have lasting implications. For example, if you choose the standard mileage deduction you can choose to continue using that method in future years or change over to tracking actual expenses. However, if you choose to start in year one by tracking actual expenses, you cannot switch over to using the standard mileage rate method for that car in future years. Make sure you know which method works to your advantage and is right for your needs.

Final Thoughts about Car Tax Deductions

Keep in mind that transportation write-offs are often audited by the IRS, so keep very detailed records. If the car is also used for personal use, you must keep track of the percentage it is used for business versus personal use when calculating expenses.

There may be some exceptions but for the most part, if you’re an employee who uses your car to go back and forth to the office, unfortunately this no longer deductible as a misc itemized deduction on Schedule A. 

However, according to Investopedia, if you’re an employee and do wind up using your car for a work specific task and your employer doesn’t reimburse you. You may be able to claim things like gas and maintenance. The important thing here is to keep detailed records and have a clear way to differentiate between business and personal use.

This is not professional tax advice. Please consult a licensed CPAor the IRS website before filing your taxes.