If you use vehicles in your small business, how and when you deduct for the business use of those vehicles can have significant tax implications. It pays to learn the nuances of mileage deductions, buying versus leasing and depreciation of vehicles. Special rules for business vehicles can deliver healthy tax savings.
Some important questions
The deduction for using vehicles in your business can sometimes be significant, so it's important to make the following decisions:
- Is it better to use the standard mileage rate as your deduction or the actual expenses incurred for a vehicle used for this business?
- Who should own the vehicle? The business, the business owner or the employee?
- Should the business lease or buy the vehicle?
Here's a general overview
Business vehicles are cars, SUVs and pickup trucks that are used for business activities.
What does not qualify:
- Vehicles used as equipment, such as dump trucks
- Vehicles used for hire, such as taxi cabs or airport transport vans
Congress decided years ago that the taxpayers should not subsidize extravagant vehicles used by business. To prevent that, the law squeezes otherwise allowable depreciation deductions for “luxury cars.” But don’t think Rolls Royce or Ferrari. Congress has a much less extravagant view of luxury. For 2018, the maximum first-year depreciation write-off for a new or used car is $10,000 plus up to an additional $8,000 in bonus depreciation. (These figures assume 100% business use.)
The limit is higher for SUVs with loaded vehicle weights over 6,000 pounds but no more than 14,000 pounds. For such vehicles put into use in 2018, 100% of the cost can be expensed using bonus depreciation, assuming 100% business use.
Keep good records
The IRS is very fussy about writing off the cost of vehicles, so if you plan to take a vehicle deduction it's essential to keep a detailed log of your business miles and other expenses if you want to write them off, too. We suggest that you pick up a vehicle expense log at an office supply or stationary store and keep it in your car.
Standard mileage rate versus actual expenses
Whether to use the standard mileage rate or actual costs is a numbers game. Generally, the more economical the vehicle is to operate, the more likely it is that the standard mileage rate will give you the bigger deduction. Conversely, the higher the operating costs, e.g., gas, repairs, tires, etc. the more beneficial the actual cost method is likely to be.
Standard mileage rate
The IRS allows employees and self-employed individuals to use a standard mileage rate, which for 2018 business driving is 54.5 cents per mile.
To determine the number of miles driven for business you need two numbers for each business vehicle:
- The total number of miles driven during the year
- The total number of miles driven just for business
Tracking your total mileage for the year is easy. Write down the odometer reading on the day that you start using a vehicle for business and on the day the year ends. Business miles are the number of miles actually driven for business, for example, to visit a customer or meet a client.
Remember that any miles driven to the bank, office supply store, computer store, to meet with your accountant or to meet with your lawyer on business matters also count as part of your business mileage deduction.
Some travel is not considered business-related:
- Driving from your home to your workplace and back is commuting. It's not deductible on either your business or your individual return.
- If you stop at the store on the way home from a business trip, the remaining miles from the store to home are generally considered personal mileage, so you usually can't include them.
Actual vehicle expenses
You can deduct interest on an auto loan, registration and property tax fees, and parking and tolls in addition to the standard mileage rate deduction, as long as you can prove that they are business expenses. Here’s a list of auto-related expenses you might incur.
- Gas and oil
- Maintenance and repairs
- Registration fees and taxes*
- Vehicle loan interest*
- Rental or lease payments
- Garage rent
- Tolls and parking fees*
*Also deductible if you choose the standard mileage method.
The percentage of use (based on miles) that the vehicle is used for business determines the deductible portion of these expenses.
Here's how the math works:
Let's say your gas, oil and repairs came to $3,000 for the year. Fees and taxes were $500. Loan interest and insurance were $1,500. If it's an old car, the is no depreciation write-off. Your total "actual" expenses were $5,000.
Your total mileage was 18,000 and documented business miles were 16,200. The business-use percentage is 90% (16,200 divided by 18,000).
If you use the actual expenses method, you could deduct $4500 (90% of $5,000).
If you use the standard mileage rate, your 2018 deduction would be $8,829 (16,200 x 54.5 cents). In this case, the standard mileage method gives you the bigger tax benefit.
The business-use percentage usually varies from year to year. Operating expenses are annual expenses and do not affect subsequent years.
This is the amount you can deduct over time for general wear and tear of the vehicle. The standard mileage rate includes an amount for depreciation and reduces the adjusted basis of the vehicle when you decide to sell or otherwise dispose of it. In the example above, it works out this way:
2018 Standard Mileage Deduction: 16,200 miles x 54.5 cents per mile = $8,829.
Equivalent Vehicle Depreciation included: 16,200 miles x 25 cents per mile = $4,050.
If you use the "actual" expenses method and the vehicle was acquired new in 2018, the maximum first-year depreciation deduction, including bonus depreciation, for for an auto in 2018 is $18,000.
In the example above, your depreciation on an auto would be limited to the business-use percentage of 90% times the maximum 2018 first-year maximum of $18,000, or $16,200.
Since depreciation accumulates, each year's business mileage affects the adjusted basis of the vehicle. The adjusted basis will, in turn, be used to determine the gain or loss when the vehicle is sold, so keeping good records is essential.
Note: In order to use the standard mileage method, you must choose this method in the first year the vehicle is placed in service. In later years you can choose to use the standard mileage rate or actual expenses.
The ownership dilemma
Self-employed owner (sole proprietor)
The owner can choose to use either the actual expense method or the standard mileage rate method subject to the rules outlined above.
If an employee uses a personal vehicle for business, the employer typically reimburses the employee for the business mileage incurred at the standard mileage rate. The amount received for documented business miles is not taxable to the employee and vehicle expenses are deductible by the employer.
Note: If you are a single-member LLC and file a Schedule C with your personal tax return (Form 1040), you are considered a self-employed owner for tax purposes.
S Corporation/C Corporation
A vehicle used for business may be owned by the corporation or by an employee (even a shareholder employee). The method of claiming the deduction will differ depending on the ownership of the vehicle.
Vehicle owned by employee
An employee (or a shareholder employee) who uses a personal vehicle for business can submit a request for reimbursement to the corporation, based on documented business miles. The corporation can then reimburse the employee based on the standard mileage rate for business.
In this case, the corporation gets a deduction for vehicle expenses paid, and the reimbursement is not reportable as taxable income to the employee.
If the employee has to pay his or her own expenses for travel on behalf of the corporation, for tax years prior to 2018, the employee claims an unreimbursed employee business expense deduction as a miscellaneous itemized deduction on Schedule A of Form 1040. The employee can use the actual method or standard mileage method to calculate the deductible amount. For tax years after 2017, unreimbursed employee expenses are no longer deductible.
Vehicle owned by the corporation
A corporation must determine the deduction for vehicles it owns based on actual operating expenses. The corporation is also limited by the business-use percentage of the vehicle.
The corporation can deduct all of the operating expenses of the vehicle without regard to the business-use percentage, if the personal-use percentage is treated as income to the employee. This is typically the case when you get the use of a company car as an employee benefit. The corporation's deduction for the personal-use percentage is treated as a compensation expense.
One more thing: The employee's income for personal use of a corporate vehicle is determined based on the market value of the vehicle, not on the actual expenses or standard mileage rate used to determine the deduction, for example, the cost to rent a vehicle.
The rules are the same as an S Corporation, with one exception: A partner/member who has unreimbursed auto expenses as a requirement of the partnership/LLC agreement can typically claim the deduction on Schedule E of Form 1040 rather than on Schedule A.
Note: It's generally less burdensome for a business to allow an employee (even a shareholder, partner, or member) to use his or her personal vehicle and submit an expense reimbursement request. This eliminates a substantial amount of record-keeping for the employer. The tracking of business mileage cannot, unfortunately, be avoided or eliminated no matter what reporting choice you make.
Buy or lease?
The standard mileage rate can also be used for a leased vehicle. If you use the standard mileage rate, you cannot switch to the actual expense method in a later year.
If you use the standard mileage rate for a leased vehicle, the lease payment amount is not deductible.
Leased vehicles are not depreciated. Instead, the business portion of the lease payment is deducted. When the value of the leased vehicle is above a certain amount, you must also subtract an "income inclusion" amount from the deductible amount. For vehicles first leased in 2018, the threshold is $50,000. This income inclusion rule is an attempt to equalize the tax benefits from leasing and owning business vehicles.
For example, a vehicle leased in 2018 that is valued at $60,500 and that is used 100% for business would require an income inclusion amount of $30 to be subtracted from the 2018 lease payments in arriving at the deductible amount for that year. In 2019, the income inclusion amount would be $66. Higher income inclusion amounts would apply for 2020 through 2022.
The bottom line
- Keep detailed records.
- If you drive a lot for business and have few vehicle expenses, use the standard mileage rate to determine your deduction.
- Business use of a vehicle is a legitimate deductible expense and should be claimed by the taxpayer.
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