Expensing Vehicle Expenses as a Business Owner

As a business owner, one of the many benefits you can entake advantage of  is the ability to deduct vehicle expenses on your taxes. By properly tracking and documenting these expenses, you can reduce your taxable income and ultimately save money. However, to ensure you receive the maximum tax benefit, it's crucial to understand the rules and regulations governing the expensing of vehicle expenses. In this article, we'll explore the essentials of deducting vehicle expenses and outline the information your tax accountant will need to help you optimize your tax savings.

It's important to note that there are two methods laid out by the IRS for deducting vehicle expenses and that both of these methods depend on you keeping accurate records of the business mileage versus personal mileage use of the car. The best practice for mileage tracking is always the method you will stick with most consistently. Whether that means a notebook in your car, an app that tracks your mileage automatically, or entering it into your bookkeeping software, choose whatever is easiest for you.

Types of Vehicle Expenses

Before diving into the details of what your tax accountant will require, it's essential to identify the types of vehicle expenses that are typically deductible for business owners. These expenses may include:

• Fuel Costs: The cost of gasoline or diesel used for business-related travel can be deducted.

• Maintenance and Repairs: Expenses for routine vehicle maintenance, such as oil changes, tire rotations, and brake repairs, are deductible.

• Depreciation: You can deduct a portion of your vehicle's purchase price as depreciation, which reflects the wear and tear on the vehicle over time.

• Insurance: Premiums for auto insurance that covers business use of your vehicle can be expensed.

• Interest on Auto Loans: If you've financed your vehicle, the interest portion of your loan payments may be deductible.

• Lease Payments: If you lease your vehicle for business purposes, a portion of the lease payments can be expensed.

• Tolls and Parking: Costs associated with business-related tolls and parking fees can be deducted.

• Registration and License Fees: Fees to register and license your vehicle can also be considered as deductible expenses.

Standard Mileage Rate - For the standard mileage rate for the cost of operating your car for business, refer to Standard Mileage Rates or Publication 463, Travel, Entertainment, Gift, and Car Expenses. To use the standard mileage rate, you must own or lease the car and:

1. You must not operate five or more cars at the same time, as in a fleet operation,

2. You must not have claimed a depreciation deduction for the car using any method other than straight-line,

3. You must not have claimed a Section 179 deduction on the car,

4. You must not have claimed the special depreciation allowance on the car, and

5. You must not have claimed actual expenses after 1997 for a car you lease.

For a car you lease, you must use the standard mileage rate method for the entire lease period (including renewals) if you choose the standard mileage rate.

Actual Expenses - To use the actual expense method, you must determine what it actually costs to operate the car for the portion of the overall use of the car that's business use. Include gas, oil, repairs, tires, insurance, registration fees, licenses, and depreciation (or lease payments) attributable to the portion of the total miles driven that are business miles.

Note: Other car expenses for parking fees and tolls attributable to business use are separately deductible, whether you use the standard mileage rate or actual expenses.

Information Your Tax Accountant Needs

To maximize your tax savings, your tax accountant will need specific information related to your vehicle and its usage. Here's a list of crucial details to provide:

• Total Mileage: Your accountant will need to know the total number of miles your vehicle was driven during the tax year.

• Business Mileage: The number of miles driven for business purposes should be documented separately.

• Personal Mileage: You should also record the number of miles driven for personal use.

• Vehicle Information: Details about your vehicle, including its make, model, year, and the date it was placed in service for business use.

• Expense Documentation: Keep receipts, invoices, and records of all vehicle-related expenses, including fuel, maintenance, repairs, insurance, loan interest, lease payments, and tolls and parking.

• Depreciation Information: If you're claiming depreciation, provide your accountant with the purchase price, date of purchase, and any additional information about the vehicle's depreciation method.

• Business Purpose Documentation: Keep a log or record of all business-related trips, including dates, destinations, mileage, and the purpose of the trip.

• Commuting Expenses: Be clear about any commuting expenses, as these are typically not deductible unless you have a home office that qualifies for the home office deduction.

Deducting vehicle expenses as a business owner can significantly reduce your tax liability, but it requires meticulous record-keeping and adherence to IRS guidelines. To ensure you're taking full advantage of this tax benefit, provide your tax accountant with accurate and well-organized information about your vehicle and its usage. By doing so, you can maximize your tax savings and invest those funds back into your business's growth and success. Remember, it's always advisable to consult a tax professional for personalized advice based on your unique circumstances.