Navigating Business Vehicle Expenses for Tax Savings

Navigating Business Vehicle Expenses for Tax Savings

Business Vehicle Expenses

The deduction for business vehicle expenses typically applies exclusively to individuals who are self-employed. However, there are exceptions for: 

  • Armed Forces reservists 
  • Qualified performing artists
  • Fee-basis state or local government officials 

Reimbursements through accountable plans are permissible.  

If you utilize your car or truck for business-related activities, you may be eligible to deduct the expenses associated with its operation and maintenance. Additionally, you may have the opportunity to deduct other costs related to local transportation and overnight business travel away from your home. Whether you choose to use the standard mileage rate or actual expenses, you can claim deductions if your vehicle serves business purposes. It’s important to take note that in order to have the option of claiming the standard mileage rate in later years, you must initially opt for this rate in the first year. 

Local Transportation

Local transportation expenses encompass the necessary and ordinary costs of: 

  • Commuting between different work locations within the city or general vicinity designated as your tax home during the course of your business 
  • Making visits to clients or customers 
  • Attending a business meeting held outside of your regular workplace 

The business use of a vehicle also extends to commuting between a home office and another work location within the same trade or business. 

It’s important to note that local business transportation does not cover expenses incurred during overnight travel away from home. Those expenses are eligible for deduction under travel expenses. However, if you use your car during overnight travel away from home, utilize these guidelines to calculate your car expense deduction. 

Tax Home

In most cases, your tax home refers to your usual place of work, regardless of the location of your family residence. It encompasses the entire city or broader area where your business operates. You are typically not eligible to claim deductions for the expenses related to driving your car or truck between your residence and your primary workplace. These expenses are considered personal commuting costs. 

Office in Home

If you have an office in your home that qualifies as your primary place of business, your workplace can be considered your home. As a result, you can deduct the daily transportation expenses incurred between your home and another work location within the same trade or business. 

Personal Use

Any use of a vehicle that does not serve business purposes is categorized as personal use. As a result, it is not eligible for deduction. However, in cases where a vehicle is used for both business and personal purposes, the percentage of use must be allocated. 

business vehicle expenses 2

Standard Mileage Rate

Opting for the standard mileage rate negates the requirement to maintain records of actual costs. In 2023, the standard mileage rate for the cost of operating your car for business use in 65.5¢ per mile. This rate can also be applied to cars used for hire, like a taxi, Uber, or Lyft, however limitations still apply.  

Some costs that are included in the standard mileage rate encompass depreciation, lease, payments, maintenance and repairs, gasoline, oil, insurance, and vehicle registration fees. Some costs that are not included in the stand mileage rate, but that are still deductible, are auto loan interest, personal property tax, and parking fees and tolls. These deductions will only apply if they are business related, and the business-use percentage will determine the deduction. 

Selecting the Standard Mileage Rate

To apply the standard mileage rate to a car that you own, it must be utilized in the initial year your car is available for business. In subsequent years, you have the option to decide between continuing to utilizing the standard mileage rate or switching to record actual expenses. You cannot simultaneously claim deductions for actual car expenses in the same year if you opt for the standard mileage rate. 

Limitations to the Standard Mileage Rate

You cannot choose the standard mileage rate if you: 

  • Operate five or more cars simultaneously (like in fleet operations) 
  • Have taken a depreciation deduction for the car using any method besides straight line 
  • Claimed a Section 179 deduction on the car 
  • Claimed the special depreciation allowance on the car 
  • Deducted actual car expenses for a leased vehicle 

If you own or lease five or more cars designated for business use simultaneously, you are not eligible to apply the standard mileage rate for any of them. Nevertheless, it may be possible to claim actual expenses incurred for operating each of these cars in your business. If you alternate the use of these cars for business purposes by using them at different times, it does not fall under the category of using five or more cars for business simultaneously. Therefore, you can use the standard mileage rate.  

Actual Expense Method

If you opt for the actual expense method in the initial year, you must continue to use it in all subsequent years as long as the vehicle remains in business use. Sales tax incurred during the car’s purchase is included in the vehicle’s basis and subsequently deducted through depreciation. 

Some actual expenses for business vehicles are:  

  • Depreciation 
  • Garage rent 
  • Gas
  • Insurance 
  • Lease payments 
  • Licenses 
  • Oil
  • Parking fees 
  • Registration fees 
  • Repairs 
  • Tires 
  • Tolls 

It’s essential to keep thorough records of these expenses. Then, you need to determine the business-related proportion of the vehicle expenses. If the car is also used for personal purposes, keep track of the number of business miles driven for the year along with the number of total miles driven for the year to calculate the cost of operating the vehicle as a business expense.  

Nondeductible Expenses

Any fines for violations of traffic laws are not deductible in any circumstance, even if incurred while driving for a business-related purpose. 

Effectively claiming business vehicle expenses on your tax return has the potential to result in substantial tax savings. For personalized guidance and assistance in optimizing your tax savings related to business vehicle expenses, reach out to our office for a free consultation.

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2023-10-25T13:40:47+00:00September 14th, 2023|Business, Tax|

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