One of the questions we are asked most often is: can I deduct my vehicle? If you are an employee, the short answer is, unfortunately, no. The Tax Cuts and Jobs Act of 2017 effectively removed this deduction beginning with tax year 2018.
However, if you have your own business, the answer is quite different. But it’s not an easy answer and there are many items to discuss. Here are some basic guidelines.
There are two choices when it comes to deducting business use of a vehicle: standard mileage rate or actual expenses.
STANDARD MILEAGE RATE
The easier of the two methods is the standard mileage rate, which is set by the IRS every year. For 2019, the rate is 58 cents per mile. Business mileage is tallied for the year and, simply, multiplied by the pre-determined rate. Voila! Instant deduction!
Pro tip: Use a smartphone app to easily log your miles and print a report at tax time. But be cautious with your data plan.
Another Pro tip: When using the standard mileage deduction, you may also deduct interest paid on a vehicle loan. The interest must be prorated for business use of the vehicle.
ACTUAL EXPENSE METHOD
The actual expense method allows you to deduct auto insurance, repairs, gas, and lease payments or, if not leased, loan interest and depreciation of the purchase price of the vehicle. All expenses must be prorated for business use of the vehicle.
Pro tip: Business use of the vehicle is determined by dividing the number of business miles driven by the number of total miles put on the vehicle during the year. The formula results in the business use percentage.
TRACKING MILEAGE
Whether taking the standard mileage rate deduction or the actual vehicle expense deduction, you need to track mileage. Knowing how many miles you put on your vehicle during the year, and how many of these miles were for business versus personal purposes, is a necessity at tax time.
COMMUTING MILES
Keep in mind that commuting miles are not deductible. These are the miles driven from your home to your first business stop, and then from your last business stop back home.
Pro Tip: Depending on how far you drive for a job, it could benefit you to have a bank or post office near your house where you can conduct business. Make one of these your first and last stop of the day.
Another Pro Tip: If you take a home office deduction, this becomes your first and last business stop, thereby avoiding the commuting rules. Ask us if you qualify for a home office deduction.
Yet Another Pro Tip: Parking and tolls expenses are deductible under either method.
So which option do you choose?
The obvious answer would be whichever method gives you the greater deduction. But this isn’t always a wise move and the choice you make in the first year of owning a vehicle may lock you into that decision for the entire length of ownership.
Let’s say Jane leases a new car in August and decides to deduct using the standard mileage rate in year one because it gives her a bigger refund. In year two, she realizes that 12 months of lease payments makes for a greater deduction under the actual expense method. Jane is out of luck. She must stick with the standard mileage rate method for the entire lease period.
Under the same scenario, had Jane chosen to finance her new vehicle or buy it outright, she could have made the method change for year 2. However, she can’t flip-flop every year. If she chooses to deduct actual expenses in year 2, she would have to continue with that method for the remaining years.
When choosing the actual expense method in year one, whether leasing, financing, or buying the vehicle outright, Jane must continue to use the actual expense method for the entirety of ownership. When she decides to get a new car, she can make the decision all over again.
What happens when the vehicle is traded or sold?
No matter which method is chosen for deduction, when the vehicle is sold, a gain or loss on the sale must be calculated with depreciation factored in. A portion of the standard mileage rate, even though it changes every year, is attributed towards depreciation.
So, you see that this is not a simple deduction to contend with. And the rules are ever changing! Depreciation rules differ based not only on tax law changes, but also on the weight of the vehicle and how many vehicles are used by the business. If you find yourself in the realm of vehicle deduction, be sure to schedule a consultation with one of our knowledgeable tax experts.