There are all kinds of rules and regulations when it comes to deducting expenses for business vehicles on your taxes. But let's assume that you're not the CEO of a large corporation with a fleet of company vehicles.
You're a small business owner using your personal vehicle for business purposes, and you want to know what kinds of deductions you're entitled to. If you keep accurate records of your mileage and auto repairs, this can be one of the biggest business deductions you make, and you're entitled to it even if you don't use the car for business a hundred percent of the time. How do you do the math? There are some important things to consider before you write off vehicle expenses which can help you get the maximum amount of money back, as well as make the process easier in the future.
1. The Standard Mileage Rate
There are two ways to deduct business vehicle mileage on your tax return. You can go with the standard mileage rate, which varies from year to year - it's 56.5 cents a gallon for 2013. You might think this amount is rather high, and it is, because choosing the standard mileage rate means you won't make separate deductions for vehicle repairs, insurance. or depreciation. It's all included in that standard rate.
The standard rate is preferable for most average, economical cars, and it's important to remember that you must choose the standard rate the first year you use your car for business or you'll be forced to deduct that car using the actual expense method on all future tax returns.
After the first year, you can switch back and forth between the methods, depending on how much your vehicle expenses are during the year. Most people prefer the standard mileage rate because it's much easier and only requires you to keep track of your mileage, not every cost you incur in relation to your car. If you drive a relatively affordable vehicle, it will more than cover the cost.
2. The Actual Expense Method
There are many reasons why a business owner might choose to deduct their vehicle expenses using the actual expense method rather than the standard rate. The most common reason is the fuel economy of your car. If you drive an SUV or van for your business, the standard rate might actually afford you much less money than what you truly spent on gas and repairs. Another reason is if your vehicle went through a lot of wear and tear that year and you want to deduct more money for repairs and depreciation than usual.
Also, cars for hire services like limo or taxi companies must use this method every year. Whatever the reason, filing with the actual expense method will require a lot more math and a lot more records. You may need the help of a good accountant to go through your receipts and decide the right amount of money to claim for mileage, depreciation, mechanical work, insurance, and registration fees. Most people don't deduct actual expenses every year unless they drive an unusually large or expensive vehicle, but you might need to use it for certain years, depending on your circumstances.
3. Determining Your Business Percentage
If you have a car that you only use for business part of the time, finding out how much your deduction is can be a simple equation. You must keep track of your business miles throughout the year, and then multiply that by the standard mileage rate. To get the percentage of time you used your car for business, multiply the business miles by the actual miles.
Some people think they can get away with claiming 100 percent of their vehicle use as business use, but the IRS can usually spot the difference. If you are audited, only an accurate mileage log will allow you to keep your deductions, including how much you spent on gas, for people filing using actual expenses. And only true business travel counts towards your business percentage, not commuting to an office, and not driving around with your company's phone number on your window. Making deliveries, meeting with clients, and even going to the post office can be considered business trips.
Figuring out business vehicle expenses can be a tricky business, which is why many small business owners need an accounting service to help them with this and other business aspects of their taxes. But once you get a handle on what you can write off and how, you might find that there are many rewards during tax season for small business, and deducting the cost of driving is one of the biggest. It's good to know the government can give you the help you need when you're trying to make your mark on the market.
Author Amy Thomson blogs for Monkey.co.uk. Check out her other articles at You can follow her on Twitter @VroomVroomAmy.
