Maximizing Your Car Write-Offs

What car expenses can you write off on your business taxes?

Owning and running a car comes with costs, but some of these costs can be written off if they’re for business purposes. How much you can write off depends on how much you use the vehicle for business versus personal use.

Solely for business: If you use the car exclusively for business, you can write off the full cost of ownership and maintenance.

Mixed use: If you split the car’s use between business and personal purposes, you can write off the portion related to business. For instance, if you use the car for business 25% of the time, you can write off 25% of the total costs or the miles driven.

Deductible car expenses according to the IRS

Here are the expenses that are eligible for tax deductions, according to the IRS:

Mileage. The IRS publishes a standard mileage rate each year which you can use to calculate your mileage deduction—just multiply the rate by the number of miles you drove for business purposes. 

Note that commuting from your home to an office and back is not deductible; that is classified as a personal expense. Additionally, if you use the standard mileage rate deduction, you won’t be able to deduct other expenses associated with your vehicle, including depreciation, gas or fuel, registration and license fees, etc. You can, however, deduct the cost of parking and tolls.

Depreciation. Depreciation refers to the cost of regular wear and tear on your car, and can be calculated using the Modified Accelerated Cost Recovery System (MACRS). 

If you’re calculating your auto-related deductions using the actual expense method, meaning you keep track of your actual expenses (with receipts and documentation), you’ll calculate your depreciation as an actual expense.  

• Gas and fuel costs. Any gasoline or fuel costs associated with business use of your car can be deducted. 
• Lease payments. If you lease your vehicle, you can deduct a percentage of the lease payments. This percentage would be equal to the percentage of total miles that you drove for business. 
• Loan interest payments. Similarly, you can deduct a percentage of the interest you pay on your car loan if you own the car. 
• Administrative fees for licenses, registration, etc. Registration renewals, license renewals, and other administrative fees are deductible.
• Maintenance and repairs. Expenses related to maintaining and repairing your vehicle are deductible. This includes oil changes, tire rotations, brake repairs, and other necessary maintenance (remember, only the portion of it that applies to business use of the vehicle).
• Insurance premiums. If your auto insurance premium covers business use of your vehicle, you can deduct a portion of those payments. 

Strategies for maximizing your vehicle-related deductions

Maximizing deductions: Record-keeping tips

Maintaining meticulous records is vital to maximizing your car deductions. This includes documenting all your auto-related expenses, mileage, and the purpose of each trip. Best practices for record-keeping include:

• Maintain a dedicated mileage log for business use. Record the date, starting and ending locations, mileage, and purpose of the trip for each business-related journey.
• Keep copies of all receipts for fuel, maintenance, repairs, insurance, and other auto-related expenses. Note the business-related portions where applicable.
• Use a smartphone app or digital tool designed for expense tracking and mileage logging to make record-keeping more convenient and accurate.

Choose the right deduction method

Choosing the right method, standard mileage or actual expenses, can significantly impact your deductions. 

Standard mileage rate

The standard mileage rate is a simplified method that allows you to deduct a fixed amount for each business mile driven. Using the standard mileage rate is straightforward and requires less record-keeping; however, it might not provide the highest deduction if your actual expenses are significantly higher than the standard rate. If you have the documentation, it’s a good idea to evaluate both methods to determine which one is more advantageous for your specific situation.

Actual expenses method

The actual expenses method involves itemizing all of your vehicle-related costs, including depreciation, fuel, maintenance, insurance, and other expenses. To use this method, you need to keep detailed records of all expenses related to your vehicle. While the actual expenses method can result in higher deductions if your costs are substantial, it does require more documentation and record-keeping. You'll also need to calculate the percentage of your vehicle's business use accurately. Before selecting a deduction method, it’s best to consult with a tax professional to determine which one is best suited to your unique circumstances. If you’re able to, you can also calculate your deductions using both methods, and choose the one that results in a higher amount. 

Consider taking a Section 179 deduction

If you’ve just purchased any type of vehicle to use for business purposes, and you’re using it for business more than 50 percent of the time, you can take something called a Section 179 deduction. This means that instead of depreciating the vehicle over time, you can deduct the full eligible amount of the purchase in a single year, lowering your tax liability. This can be a helpful strategy if you believe you will owe money on your tax bill, and want to reduce your taxable income for the year. Source