If driving a vehicle is part of your trade or business, whether it’s a car, truck, or van, you can deduct the vehicle expenses to lower the taxable income you report on your business tax return. While the costs of operating your vehicle can seem pretty straightforward, there are several considerations you should understand to optimize your deduction depending on your particular situation.
This seems to be the age-old question among business owners and the answer is, it depends! The standard mileage rate method simplifies the vehicle expenses by basing the deduction on the actual number of miles driven, instead of actual expenses. This means that instead of separately tracking the costs of operating your vehicle, you only track the actual miles driven and multiple those miles by the standard mileage rate set by the Internal Revenue Service (IRS) each year. Keep in mind that if your vehicle is used for business and personal purposes, you only include the actual miles driven for business, not including personal or commuting miles.
But while it may be easier to calculate your vehicle expenses using the standard mileage rate, you may be losing out on maximizing your deduction if your actual vehicle costs are higher than the computed standard mileage deduction. The good news is that you can switch back and forth between these two methods as long as you own the vehicle and you use the standard mileage rate method for the first year your vehicle was in service. After that, you can calculate both the standard mileage and actual costs and use whichever method yields a higher deduction. Alternatively, if you use the actual expense method for the first year, you must use that method for the life of the vehicle. Leased vehicles are also disallowed from this rule, so if you use the actual expense method for the first year in service of a leased vehicle, you must use it for the remainder of the lease period.
Expenses Included in the Standard Mileage Rate
It’s important to know what the standard mileage rate deduction includes if you choose this method, and in most cases it’s the same as actual expenses, including gas and oil, insurance, registration and license fees, and depreciation if you own the vehicle or lease payments if a leased vehicle, as well as the costs associated with the maintenance of the vehicle, such as repairs and maintenance, car washes, tires, and garage rent. However, even if you use the standard mileage rate deduction, you can separately deduct any business-related parking fees and tolls (excluding parking fees you pay to park your car at your place of work). In addition, if you’re self-employed, you can also deduct vehicle registration fees and interest paid on a car loan based on the portion that represents your business use of the car.
Five or More Rule
One caveat in using the standard mileage rate is that your business cannot operate five or more vehicles at the same time (such as in fleet operations). Once five or more vehicles are being used at the same time, the standard mileage rate method is no longer allowed, and the actual expenses method must be used. Note that this rule is based on the number of vehicles being used at the same time, not necessarily the number of vehicles the business owns.
Things to Consider
Choosing between the standard deduction rate and actual expenses method may seem like an easy choice, however, there are several factors that could affect your decision. In most cases, it’s best to consider your options before you place your vehicle into service to ensure that you will receive the maximum deduction in future years.
As always, our CPAs at Mason + Rich are ready to answer any additional questions. Feel free to call us at 603-224-2000.