For those who run a business, every other trip might be for business purposes. The following is a guide to deducting expenses on your personal vehicle for business.
For the purposes of this article we will be concentrating on car and truck expense deductions on the Schedule C for a sole proprietor. (The ability to deduct vehicle expenses for other types of business entities varies from what is explained here. Contact our office if you have questions.)
As is true for all tax matters, your situation is unique. The information presented here is a guide. It does not constitute personal and specific tax advice. As always, contact your tax professional with questions.
There are two methods for deducting vehicle expenses:
- actual expense
- standard mileage rate
The IRS has a publication explaining each method in detail. Please note that both methods require that you track business miles as well as personal miles and commuting miles. More about mileage later.
Actual expenses
This includes exactly what you would expect: all your actual car or truck expenses that are ordinary and necessary. The gas, repairs, insurance, interest you pay may be deductible expenses. The price of the car, however, is deducted by one of the IRS specified depreciation methods. This means that the check you pay monthly for your truck loan is not the actual amount of the expense, only the interest portion is. The principle is depreciated, and subject to limitation. The vehicle also needs to pass the percentage of use test in order to qualify as a deduction.
Standard mileage
This method of deducting vehicle expenses works best for most sole proprietors. The IRS sets a standard dollar amount for each mile driven for business purposes. The amount for 2023 is 65.5c per mile. This method is also easier. You are required to keep a contemporaneous log of business miles. This means that you need to note for each business trip, the destination, purpose, and mileage, as they happen. The tax return has a line for the total mileage on that vehicle for the year, a line for commuting mileage, and a line for business miles.
A note about the three types of miles: personal, commuting, and business:
Personal
Personal miles would be driving to pick up the kids, going to the grocery store, etc. You get the picture.
Commuting
Commuting is driving to an office or regular place of business. These miles are not deductible business miles. Most people commute to work and that does not qualify for a deduction.
Business
When you are in business for yourself, you will visit clients, pick up supplies, drive to meetings, etc. Those are the miles that may be deductible for you.
You may have a trip that is a mixed-motive expenditure. An example of this would be driving to Orlando for a work convention and taking the kids with you so you all can visit Disney World. Only the miles driven if you took the Disney trip out of the equation would qualify. You may drive to Walmart for your groceries and pick up something for the office as well. This may not be a deductible business trip. These are conversations to have with your tax professional.
Whichever method of vehicle deduction you use requires keeping track of your miles. The IRS expects that you would have a log with each business trip entered along with the date, destination, purpose, and mileage. Actual expenses will be limited to the percent of business v. personal miles driven. This log can be as simple as a calendar on which you enter the information.
There are also tracking apps which will log every mile driven and ask you to fill in the details of each trip. Another figure you will need is the actual miles drive for the whole year. Make note of the odometer reading on January 1, and December 31.
Be advised that this is just a quick guide to introduce you to the business vehicle deduction. Keep track of your miles and talk to your tax professional.