Can I Claim My Car As A Business Expense?
“Can my business deduct my car payments?” “Can I buy a Tesla Model X for my business?” The answer is not as simple as you think. Let’s start from the very beginning and explain how business use of your car could potentially be a business expense.
- If you use your car for business use only, you may deduct the full cost. There are some exceptions that will be discussed in part 2.
- If you use your car for both business and personal purposes, you may deduct only the cost of its business use. To do so, you will need to calculate the percentage of business use in one of the following two methods:
- Based on mileage
- Based on actual cost
Each method involves nuances. Let's tackle them one at a time.
#1 Standard Mileage Rate
The Standard Mileage Rate requires you to track your miles. Tracking your miles is key.
You get a tax deduction based on the number of miles you’ve driven for business-related travel. The IRS provides the standard mileage rate on an annual basis. In 2021, the amount you are eligible to deduct is 56 cents per mile; for 2020, it was 57.5 cents per mile. For example, if you drove 4,500 miles in 2020, your deduction will be $2,587.50.
If you choose the standard mileage rate method, you cannot deduct the actual car expenses such as maintenance, repairs, gas, oil change, insurance, lease payments, and deprecation. These items are already factored into the mileage rate set by the IRS.
The only expenses you can deduct are costs that aren't included in the standard mileage rate, such as interest on financing your vehicle (prorated between business and personal use), parking fees, and tolls for business trips.
Fortunately, you no longer have to keep track on a piece of paper. Your phone AppStore has many options such as Mile IQ or QuickBooks to help you easily keep track.
#2 The Actual Expenses Method
The Actual Expenses method is based on car expenses you actually incurred. It includes gas, oil changes, tires, car washes, insurance, registrations fees, lease payments and depreciation.
You can only deduct the percentage of expenses that apply to the business use of your car. To find the percentage of your car's business use, add up your business miles and the total number of miles you drove for the year. For example, if you drove 6,500 miles for business and your odometer indicates you drove 12,000 miles for the year, divide 6,500 by 12,000. The result is 54%. This is the percentage of your vehicle's business use.
You then multiply the total of your actual expenses by this percentage to determine your actual deduction allowed.
In part 2, we will discuss special rules that apply while purchasing a vehicle.
Which method is right for you?
Oftentimes, either method will have a similar outcome. But keep in mind, based on your unique circumstances, the two methods can potentially produce significantly different outcomes.
For example, large lease payments and low business mileage might result in a higher deduction using the actual expenses method. However, if your business mileage is significant, you might have a higher deduction using the standard mileage method.
It’s important that you keep all your receipts so you can calculate the deduction both ways, and then choose the method that benefits you most.
If you're looking for simplicity, use the standard mileage rate. It requires less recordkeeping, as you only need to keep track on how many business miles you drove, and not the actual expenses you incurred for your car.
Can you switch methods from year-to-year?
- In order for you to use the standard mileage method in future years, you must use the standard mileage rate in the first year you use a car for business.
- If you use the standard mileage rate for the first year, you can change to the actual expense method in a later year. You can alternate between the two methods in subsequent years.
Keep in mind that this rule only applies to purchased cars. If you lease your car, you must use the same method for the entire lease period.
Coming next… In part 2 we will cover what is considered business use of a vehicle, and buying a luxury car for your business.
↔️ Looking for more tax tips? 10 Tax Planning Tips That You Should Implement for your Business Before Year-End