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, 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.
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 claim the deduction on Schedule E of Form 1040 rather than on Schedule A.