Pop in that mouth guard, do some push-ups, and get ready because once tax season rolls around? It’s deduction game time.
Tracking your legitimate business expenses is the key to lowering the amount you owe to the government. And as you well know, when you are a small operation, every cent counts.
As a small business owner, using your personal vehicle for work is often unavoidable. However, with some careful planning, it’s simple (and worthwhile!) to track this expense for your end-of-year write-offs.
In order to avoid a metaphorical yellow card—and a literal audit—it’s crucial to familiarize yourself with the rules of personal vehicle deductions. Read on for our top tips that will help you reduce your tax burden while on your way to the business big leagues.
Who can actually deduct their personal vehicle usage?
Unless you are a business owner or self-employed, you cannot just “write it off” when it comes to using your personal vehicle for business purposes.
However, if you do fall into this first category: Congratulations you hustler! It’s time to get your head in the game. You’re about to make some serious tax decisions and a coin toss isn’t going to cut it.
But wait, what about an employee who uses their car for work? Other than a few very specific exceptions, no dice. More on that later.
Using your personal vehicle for work means separating business from pleasure. You will need to determine the percentage you use your car for work in order to calculate an accurate deduction. There are apps that will do this for you, or a simple notebook for tracking mileage purposes is an analog throwback.
Got your percentage? Good. Now it’s time to choose how you will report these expenses.
Decisions, Decisions: Standard Mileage VS Actual Expenses
The IRS gives you two ways to claim deductions when it comes to using your vehicle for professional purposes. The one you choose can be a real game changer.
“Standard Mileage Deduction” or “Actual Expenses” is the tricky conundrum of a small business owner.
The standard mileage deduction is the most straightforward option. Each year the IRS sets a mileage rate. For 2021 that rate is $0.56 per mile for business usage. Multiply this rate by the miles you used for work and voila! Standard mileage deduction.
Caveat—if you choose this option, you must make this decision the first year your car is used for business. Don’t panic. You can change to actual expenses in later years. If leasing a car, you must use this option for the entire lease period.
If you suspect the standard rate isn’t saving you every cent possible, you can choose to deduct your actual expenses.
But beware. This option requires more documentation as it takes into account expenses such as:
- Gas and Oil
- Registration Fees
And be aware: commuting between your home and your regular place of work does not count as valid business mileage. That’s just regular commuting. And don’t think you can fool the IRS by taking a “work call” or talking shop with your carpool buddies. The feds ain’t buyin’ it.
How does vehicle depreciation work, exactly?
So, you’re a super organized, type-A hotshot who’s chosen the actual expense route.
Now it’s time to talk about depreciation, or the “wear and tear” costs on your sweet ride.
Depreciation is only applied when you use the actual expenses route, since the standard mileage rate already accounts for it. To figure out deprecation, you will need to know the value of your car.
The basis of your personal vehicle depreciation will be the fair market value, which will ultimately be a lower value than what you initially paid. If your car was hauling beach chairs and boogie boards in its former life, then some of that wear and tear is on you.
Again, you can only use your business percentage for depreciation. So for example, if you use your car 60% for work you can only depreciate 60% of the basis.
In most cases, you will use the Modified Accelerated Cost Recovery System (MACRS). However, if you switch to using standard mileage deduction later on, you then must use straight-line depreciation.
Record Keeping for Savings and Sanity
Properly kept records are absolutely necessary and can help avoid commingling.
The proof is in the pudding. The receipt pudding that is, and the IRS will want to see that pudding should they ever decide to audit you.
Pay close attention to this, especially if you choose to deduct actual expenses.
Qualified records include:
- account books
- statements of expense
These items come in handy when it’s not explicitly clear that you are making work trips and not just joy-riding around your town.
Like any savvy small business owner, you need to tap into your inner hoarder and keep these documents for three years. Even if they do not spark joy.
What about my employees’ vehicle usage?
You may find yourself fielding questions from employees about their personal car use for work purposes.
Because of the suspension of miscellaneous itemized deductions after 2017, employees can no longer deduct vehicle usage.
Even if an employee has unreimbursed travel expenses (hypothetically speaking—obviously you would never let that happen), they are still not allowed to deduct.
All this being said, there are exceptions. Armed Forces reservists, fee-basis state or local government officials, and certain performing artists may deduct unreimbursed travel.
Find your pre-tax season coaches.
Tax season is like the superbowl. By using the rules above, you can make the best use of your Schedule C while becoming MVP in the eyes of your accountant.
Worried about unwittingly ending up in the penalty box? Know Your Numbers PLLC can keep you on the playing field with expert coaching and resources. Contact us during tax season, or any season, to get clear, kind, and concise advice about your small business finances.
What are some of your tips and tricks for tracking personal vehicle deductions? Share it in the comments below.