Deducting Auto Expenses: A Guide for Business Owners
TL;DR (Too Long; Didn’t Read): If you elect to expense an auto using actual expenses you are stuck in future years with that method. If you choose to expense an auto using standard mileage you may change your method in future years but once you elect actual expenses you must use that method going forward.
The business deduction for auto expenses can be a bit confusing for the average owner that doesn’t spend time perusing groups, forums, articles and videos on taxes and accounting (I’m not sure what crazy person would do that….). Without learning all of the nuances of the deductions available for business use of auto I want you to remember one thing. When you take actual expenses, including depreciation, you can never take the standard mileage deduction in future years. If you choose the standard mileage deduction you may switch your method to actual expenses in future years but again once you do you may not switch back to the standard mileage deduction. This can be a very important decision for a business owner and can have significant financial repercussions.
Deciding whether to use the standard mileage method or the actual expenses method involves a few factors. The most important one, to many, is ease of record keeping. Using the standard mileage method allows a business owner to track his business miles and deduct them at current allowable IRS rates, 58 cents per miles for 2019. The IRS requires that a mileage log be kept, and retained for three years after filing your return, that includes starting mileage for the year and ending mileage for the year. Additionally, it must have each trip logged that includes reason for the trip, date of the trip, starting mileage for trip, ending mileage for trip. There are many apps out there that do this now making the business owners life a bit easier.
To elect the actual expenses method the owner must keep track of all receipts similar to any other business expense. Some allowable expenses for use of auto include: depreciation, licenses, gas, oil, tolls, insurance, garage rent, parking fees, registration fees, repairs and tires. Additionally, lease payments can be deducted but there are special rules around this, see your tax professional for more on this.
Ideally, to maximize the amount of deduction that you can take as a business owner for use of your vehicle you would track all of your expenses the first year as well as keep a mileage log. Then you can compare the two and know which method will save you the most in taxes. All though this seems like a headache the tax savings can be significant. A quick example, if you drive 10,000 business miles in 2019 and take the standard mileage rate you reduce your taxable income by $5,800 (10,000 X .58/mile). If you’re operating a sole proprietorship, reporting your income and expenses on Schedule C, and are in the higher income brackets this could save you up to $2,146 ($5,800 x 37%). I don’t know about you but I’d rather have another $2,146 in my pocket and take a trip to Costa Rica than send it to the government.
There are also methods to expense the entire cost of your car in the first year using section 179 depreciation. If this is done then the actual method of expenses must be used for that year and all years going forward. This method can be used to reduce your current year net income but facts and circumstances will dictate whether or not this is the best use of the expense. This decision should not be done without consulting a tax professional due to the issues that can arise if done incorrectly, such as the 179 deduction being limited by net income, recapture, vehicle limits, etc.
As you can see, the business use of auto deduction can prove to be a valuable tool for you to reduce taxes owed, keep more money in your pocket and manage cash flow. There are also pitfalls to be aware of and I hope you have someone in your corner that is comfortable in this arena. If not, get one. My accounting professor used to say that a good CPA doesn’t cost you money they make you money. I believe this and strive to prove her right. If you would like more detailed information on this subject check out IRS publication 463. I hope this helps some of you keep more of what you have earned!