If you use your car for business purposes, you may be able to deduct some of the costs of operating and maintaining your vehicle from your taxable income. This lowers your tax bill and saves you money in the long run. However, you need to follow the rules and guidelines set by the Internal Revenue Service (IRS) to claim this deduction.
There are two methods of calculating the car tax deduction: the actual expense method and the standard mileage rate method. Each method has its advantages and disadvantages, as well as qualifications and limitations that you need to be aware of, so you can choose which one best maximizes tax deductions for the business use of your car
That’s where this article comes in–providing all the necessary information that helps you make the right choice.
To maximize tax deductions for the business use of your car:
- Understand the Actual Expense Method
- Get to know the Standard Mileage Rate Method
- Compare and Choose the Best Method for Your Tax deduction
Want to have a full grasp? Read to the end!
1. Understand the Actual Expense Method
The actual expense method allows you to deduct the actual costs of using your car for business, such as gas, oil, repairs, insurance, depreciation, and more. To use this method, you need to keep track of all your car expenses and the percentage of business use of your car. You can only deduct the portion of the expenses that is related to your business use. This method may be more beneficial if you have a lot of car expenses or if you use your car mostly for business.
You can deduct any expenses that are necessary and ordinary for the operation and maintenance of your car, such as gas and oil, repairs and maintenance, insurance and registration fees, loan interest and tolls, parking fees and garage rent and more, but you cannot deduct any personal or non-business expenses, such as fines and penalties, personal trips and commuting, car washes and accessories, charitable contributions and political activities.
The main advantage of the actual expense method is that it may yield a higher deduction, especially if you have a lot of car expenses or if you use your car mostly for business. This method may also be more accurate and fair, as it reflects the actual costs of operating your car.
Be aware that the main disadvantage of the actual expense method is that it requires more documentation and calculation. You need to keep receipts, invoices, statements, and other documents for each expense category. You also need to keep a log or diary of your business miles and dates. You need to calculate the percentage of business use of your car and multiply it by your total car expenses. This method may be more time-consuming and complicated than the standard mileage rate method.
2. Get to know the Standard Mileage Rate Method
The standard mileage rate method allows you to deduct a fixed amount per mile for every mile you drive your car for business. This method may be more convenient if you have few car expenses or if you use your car for both personal and business purposes. To use this method, you need to keep a detailed log of your business miles and the dates of your trips. You cannot deduct any other car expenses, except for parking fees and tolls, if you use this method.
The IRS sets the standard mileage rate every year, based on the average costs of operating a car. For 2023, the standard mileage rate is 65.5 cents per mile. This means that you can deduct 65.5 cents for every mile you drive your car for business purposes.
However, you cannot use the standard mileage rate if you:
- Use your car for hire, such as a taxi or a delivery service
- Use more than four vehicles simultaneously for business, such as a fleet operation
- Claim depreciation or Section 179 deduction on your car
- Use the actual expense method in the previous year
To use the standard mileage rate method, you need to choose it in the first year of using your car for business. This means that you cannot use the actual expense method in the first year, even if it means a higher deduction for you.
However, you can switch to the actual expense method in later years, as long as you do not claim depreciation or Section 179 deduction on your car. You can also switch back to the standard mileage rate method in any subsequent year, as long as you meet the qualifications and limitations.
The main advantage of the standard mileage rate method is that it is simpler and easier than the actual expense method. You do not need to keep track of all your car expenses, except for parking fees and tolls. You only need to keep a detailed log of your business miles and dates. You just need to multiply your business miles by the standard mileage rate to get your deductible amount. This method may be more convenient and hassle-free than the actual expense method.
Consequently, the main disadvantage of the standard mileage rate method is that it may not capture all the costs of operating your car, especially if you have a lot of car expenses or if you use your car for both personal and business purposes. This method may also be less flexible and more restrictive than the actual expense method. You cannot use this method if you use your car for hire, use more than four vehicles for business, claim depreciation or Section 179 deduction on your car, or use the actual expense method in a previous year.
>>>PRO TIPS: Form 1095-B: What It Is, How to File
3. Compare and Choose the Best Method for Your Tax deduction
To compare and choose the best method for your car tax deduction, you need to consider several factors, such as:
- The type of your car: If you own or lease your car, you can use either method. However, if you rent your car, you can only use the actual expense method.
- The cost of your car: If you have a high-cost car, you may benefit more from the actual expense method, as you can deduct the depreciation or lease payments. However, if you have a low-cost car, you may benefit more from the standard mileage rate method, as you can deduct a fixed amount per mile regardless of the cost of your car.
- The usage of your car: If you use your car mostly for business, you may benefit more from the actual expense method, as you can deduct a higher percentage of your car expenses. However, if you use your car for both personal and business purposes, you may benefit more from the standard mileage rate method, as you do not need to allocate your car expenses between personal and business use.
- Your personal preference and situation: If you prefer simplicity and convenience, you may prefer the standard mileage rate method, as it requires less documentation and calculation. However, if you prefer accuracy and fairness, you may prefer the actual expense method, as it reflects the actual costs of using your car for business.
You can only use the standard mileage rate method if you use your car for business no more than four vehicles at a time. You also need to use this method in the first year of using your car for business, otherwise, you lose the option to switch to the actual expense method in later years. On the other hand, you can only use the actual expense method if you own or lease your car. You also need to have adequate records and receipts to support your deductions.
To choose the best method for you, compare the two methods and see which one results in a higher deduction for you. Use a calculator, a spreadsheet, or a software program to estimate your car tax deduction using both methods.
>>>GET SMARTER: S Corp Taxes No Income
Recap
Deducting the business use of your car can save you money on taxes, but you need to choose the best method for calculating your car tax deduction: the actual expense method or the standard mileage rate method. compare the two methods and see which one maximizes your deduction and suits your needs.
This post is to be used for informational purposes only and does not constitute legal, business, or tax advice. Each person should consult his or her own attorney, business advisor, or tax advisor with respect to matters referenced in this post. . For comprehensive tax, legal or financial advice, always contact a qualified professional in your area. S’witty Kiwi assumes no liability for actions taken in reliance upon the information contained herein.
No Comment! Be the first one.