Deducting your vehicle as a business expense is a bit tricky but well worth it, especially if you’re putting a lot of miles on your car. The number one rule of thumb when expensing your vehicle is to keep detailed records.
Make sure you use a trip or mileage log and write down each and every mile that you are using the car for business. This sounds like a major pain, but its not too bad if you keep a log book and pen in your car at all times. Whenever you drive somewhere, just write down your starting and ending odometer value for all business related travel.
There are 2 main ways to deduct your car, the mileage method or the actual expense method.
The Mileage Method
This is the simplest way to deduct the use of your car. Simply take the number of miles that you’ve driven for business at the end of the year and multiply this number by the per mile deduction amount specified by the government.
Add in additional expenses such as parking and tolls and you’re done! Using this method is advisable when you’re using an older vehicle that isn’t worth very much money or if you drive a super fuel efficient car such as a hybrid.
Actual Expense Method
With newer vehicles, you can almost always deduct more with the actual expense method. Below is how you calculate your deduction using the actual expense method.
- Add up all of your vehicle related expenses including gas, repairs, insurance and registration etc…
- Add a depreciation deduction. There are different ways of depreciating your vehicle which will be covered in a later post. If you are leasing your vehicle, you don’t have to worry about this at all. Go ahead and deduct the value of your lease payments.
- Calculate the percentage of time you are using your vehicle for business. You can do this by simply dividing the number of business miles driven by the total number of miles driven for a given year.
- Multiply this percentage by the sum of expenses and use this as your deduction!
Before deducting any portion of your vehicle, make sure you check the IRS for the latest rules. There are changes every single year so make sure that the rules that you apply still work based on the present year and locale.
You can always switch from the mileage method to the actual expense method at any time, but not the other way around. In the beginning, you should do the calculations for both and choose which one gives you the greater deduction. As with all taxes, bookkeeping is key. As long as you log all of your miles and destinations, you should have no problem justifying your deductions.
Learn other ways on how to save on your tax return
- How to Deduct Travel Expenses on Your Taxes
- Business Expenses: What You Can Deduct on Your Taxes
- How to Deduct Your Home Office on Your Taxes
- How Much The Average American Can Save On Taxes By Having A Business
- Small Business Tax Savings – The Ultimate Small Business Startup Guide Part 4
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