Buying, leasing, fueling, and maintaining a car can take a big bite out of your budget. Fortunately, these car expenses can also take a big bite out of your taxes if you keep excellent records. Whether you’re a rideshare driver or you use your car frequently in a trade or business, you might be overlooking some valuable auto deductions. However, because a lot of people also essentially try to write off the entire cost of their personal cars, auto deductions can be a common audit target. Here’s what you need to know about deducting business use of your car and keeping excellent records to back up your deductions.
You Have to Pick Standard Mileage or Actual Costs
There are two methods of deducting your car expenses: standard mileage and actual cost. The IRS sets a business mileage rate (will be $0.535/mile for 2017) which applies for all domestic business travel done by car. Thanks to the numerous mileage tracking apps currently out there, you no longer have to keep onerous pen-and-paper logbooks full of guesswork. Many apps will measure your mileage in real time and if you do ridesharing, some even track miles right in the rideshare apps themselves.
A common misconception about using the standard mileage method is that you don’t need to keep further records beyond how much you traveled. You still need to be able to prove how much you use your car for business, and whether each trip was also considered a bona fide part of your trade or business. This part is relatively cut and dry for rideshare side hustles, but less so for other types of work.
Parking and Tolls Are Always Deductible in Full
Standard mileage tends to be more beneficial than the actual cost method if you drive a lot for business purposes and also live in an area where car maintenance costs are relatively low. If you’re not making lease or car note payments as well, standard mileage is more likely to benefit you.
Regardless of which method you choose though, parking and tolls are always going to be fully deductible. If you use an automated toll-paying device like EZ-Pass, your business-related tolls are still fully deductible but the device itself needs to be allocated between personal and business usage.
You Need to Determine a Reasonable Business Percentage
When determining which auto deduction method is more beneficial, you need to figure out your business percentage. This is typically based on how many miles a year that you drive for business purposes versus personal. For example, if you drove 30,000 miles last year but only 10,000 of them were for business, then your business percentage is 1/3 (33%) so you’re limited to 33% of your actual costs with the exception of parking and tolls for strictly business-related travel. Mileage apps that keep track of your total time spent on the road can definitely help substantiate your business percentage.
Once you’ve determined your business percentage, you can then deduct the following costs subject to that percentage:
- Car insurance
- License renewal and registration
- Maintenance (inspections, washing, interior cleaning, tires)
- Actual cost of gas and oil
- Personal property taxes based on the value, not weight, of the car
- Lease payments
- Interest on car notes
- Depreciation of the car (the actual purchase price, based on a 5-year depreciation period)
- Garage rent, if applicable
Switching Methods Isn’t That Seamless
By keeping tabs on how many miles you drive for the whole year and tallying up how many of those miles had a bona fide business purpose, you can easily approach your business percentage. You’ll also have the number of miles handy to see whether you’d benefit more from the actual cost method or standard mileage. With that said, you can switch methods every year to see which one benefits you more but with some caveats.
If you were using the standard mileage rate and switch to actual expenses, you need to reduce the depreciable basis of your car by a portion of the standard mileage previously deducted. It creates additional work and results in a smaller depreciation deduction. This doesn’t apply for cars that were already fully depreciated from being in use several years.
Auto Expenses Are 100% Deductible if the Vehicle is Solely for Business Use
A vast majority of people don’t have a separate car just for business usage, hence the rules for allocating your vehicle between personal and business use on your tax return. But if your trade or business relies on having a separate vehicle, such as general contracting or food delivery, these vehicles can have 100% of their costs deducted but still require strong substantiation for mileage and their actual purpose.
Contrary to popular belief, you can’t simply have your personal car painted to advertise your business and have it suddenly meet the 100% business usage test. You still need to maintain concise records of your car-related expenses and mileage logs to prove how much you use your vehicle for business. The paint job would deductible as an advertising expense but it otherwise wouldn’t affect your business percentage if the car’s primary use is personal.
Using Your Car as an Employee
When you’re an employee and using your personal car for work, you don’t have as much leeway tax-wise as someone who’s using their car for rideshare or other forms of self-employment. If you have any unreimbursed car expenses for business trips, then you also need to keep strong records of how much you use your car for your job and deduct the same expenses. If you work more than one job, you can also deduct the mileage or actual costs of commuting between both jobs but this deduction is nullified if you’re going home first. However, parking passes and similar fees associated with parking near your workplace are nondeductible commuting expenses.
However, unlike taxpayers who have some form of self-employment income, most employees need to itemize deductions in order to see any tax benefits from car-related and other employee business expenses. The expenses also must pass a certain threshold based on your adjusted gross income. The only exception to this rule are reservists in the armed forces, certain performance artists (such as symphony members treated as employees for tax purposes), and fee-basis officials who can deduct these expenses regardless of whether they itemize or not.
Deducting your car expenses can seem like a cumbersome headache but it’s not as difficult once you determine which method is more likely to benefit you, and you can take advantage of the many apps out there which will make your mileage-related recordkeeping much easier to handle.