This past week was a relatively quiet week for Philadelphia sports (except for the Phillies making some trades for the future) so let’s get right to this week’s topic – deducting automobile expenses on your taxes. This tax issue seems to be a hot topic every tax season for small business owners and employees. So, let’s learn how to make sure you are deducting every possible dollar you can to the extent of the law. Please note that if you receive reimbursements for your mileage, you must reduce your deduction on your taxes by this amount.
Transportation Expenses in General
These deductions must be ordinary and necessary costs of getting from one workplace to another, visiting clients or customers, going to a business meeting, or going to a temporary workplace. Transportation costs to a workplace where you work regularly are not deductible (your drive from home to your office is not deductible!). There is an exception for those who work at home, however, to allow for deductibility regardless if the workplace is regular or temporary as long as it has to do with your business.
Standard Mileage Rate
This method allows you to deduct the IRS-prescribed standard mileage rate for the amount of business miles driven in a particular year (see above as a starting point to calculate this). In order to use this method, you must choose it in the first year the car is available for use in your business. From there, you are not allowed to change methods. Please note that if you lease your car and you want to use this method, you must continue using it until the lease expires.
There are some situations when you are not allowed to use this method. If you use five or more cars at the same time, claimed a Section 179 deduction on the car in the past, claimed accelerated depreciation on the car in the past, or if you claimed actual expenses for a car you leased.
In general, if you claim this method on your taxes, you cannot take any actual expenses. However, there are some exceptions, such as parking fees/tolls and personal property taxes on your car.
Actual Car Expenses
This method allows you to deduct certain amounts actually paid on your car during a given tax year. These expenses include, but are not limited to, depreciation, gasoline, oil, insurance, and repairs. If you use your car for both business and personal purposes, you can only deduct the business portion. Generally, this is done by calculating total business miles and dividing this by total miles driven.
A potential added benefit of choosing this method is that you may be able to take advantage of accelerated depreciation methods such as Section 179 and bonus depreciation. This will allow for larger write offs in year 1 vs. later years. As discussed above, if you take this type of depreciation you must continue to use this method for your car moving forward.
Auto Lease Inclusion
If you lease a car and choose the Actual method, you may need to adjust the amount you deduct for your lease payments. The inclusion is designed to limit the deduction to the amount that would be deductible as depreciation if you owned the car. This is a complex calculation that is based on the fair market value of the leased vehicle and how much is used for business purposes.
Should you have any questions on how to deduct automobile expenses in your particular situation, please feel free to contact me directly!