Qualify for the Business Use of Vehicle
To qualify for the business use of car deduction, you must be an owner of a business or be self-employed. The vehicle is not required to be under the business’ name but it must have been used for business purposes. If you use your automobile for both personal and business, the IRS requires you to split the expenses between personal and business use.
Actual Expenses
The first method is the Actual Expenses method. Under this method, the taxpayer will keep track of all the expenses they incurred while using the vehicle for business purposes. These expenses include:
- Depreciation of the vehicle (if owned); or lease payments (if leasing the vehicle)
- Gas and oil expenses
- Repairs and maintenance (including car washes)
- Auto insurance
- Registration fees
If you use your vehicle for both personal and business use, you will only be allowed to claim the percentage of expenses that were used for business purposes. To calculate the percentage of business use, you will need to divide the total business miles by the total annual mileage (business and personal miles).
For example: If your total mileage for the year was 40,000 but only 10,000 was for business use, you will only be allowed to use 40% (40,000 divided by 10,000) of the expenses as the business use of vehicle deduction. Therefore, if your total actual expenses were $5,000, you would only be able to deduct $2,000 (40% multiplied by $5,000) under the business use of vehicle deduction.
Standard Mileage Rate
Another method is to compute the business vehicle expense using the standard mileage. Under the standard mileage deduction, the total business miles would be used to calculate the total vehicle expenses for the year by multiplying the total miles by the amount per mile allotted by the IRS.
For example: Using the example above, the total mileage for the year was 40,000 but only 10,000 was for business use. The amount per mile allotted by the IRS for 2023 is 65.5 cents. Therefore, you would claim $6,550 (.655 cents multiplied by 10,000) as the total business use of vehicle deduction.
Recordkeeping
Both methods would require the taxpayer to keep adequate records. Under the actual expenses, you would need to keep records of all incurred expenses plus the total business and annual mileage. Under the standard mileage rate, you would only need to keep a record of the business and annual mileage. Click here to read more about the IRS’s recordkeeping requirements.
Mileage Tracking Apps
To keep accurate and proper recordkeeping, consider investing in a mileage tracking application! If you use Xero as your accounting software, Xero offers a mileage tracker to track mileage, as well as submitting mileage claims for reimbursement purposes. If you use QuickBooks as your accounting software, QuickBooks offers a mileage tracking app that is built in QuickBooks to keep track of the expenses. If you have employees and use Gusto as your payroll software, Gusto integrates with Timeero to track your team’s time, mileage, schedules and more, all in one app.
Whichever method you choose, we recommend keeping records of both actual expenses and mileage to determine which method is more favorable. In this manner, you can take advantage of the largest business use of vehicle deduction available to you!
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¹This blog focuses strictly on business auto expenses. Medical or moving purposes for qualified active-duty members of the Armed Forces, and miles driven in service of charitable organizations are tax deductible until further tax change updates. If you’re an Armed Forces reservist, a qualified performing artist, or a fee-basis state or local government official, see Form 2106 to calculate your vehicle expenses.
Resources:
https://www.irs.gov/taxtopics/tc510
https://www.irs.gov/newsroom/heres-the-411-on-who-can-deduct-car-expenses-on-their-tax-returns