Vehicle expenses are one of the least understood and poorly documented deductions on most tax returns. Yet it is the biggest deduction for many small business owners. It is also the one that can get you in the most trouble during an audit.
In an audit, the IRS will want you to prove all business expenses. One of their favorite items to go after are vehicle expenses because they know most business owner’s loath record keeping. Even if you use your vehicle 100% for business, be prepared to prove your expenses.
The records you must keep depend on what method you choose. While you are permitted to choose the method that produces the greatest tax benefit, switching methods is difficult or impossible so make a thoughtful decision from the beginning.
This method allows you to deduct actual expenses you incur for owning and operating your vehicle. This may include:
Really anything you spend on the vehicle can be included.
Using the standard mileage rate is quite a bit simpler. It gives a deduction for each business mile driven. Each year the IRS publishes a rate that substitutes for actual expenses.
No matter which method you choose, you may additionally deduct loan interest, parking fees, tolls, garage rent, and auto club dues.
The catch is that no matter which method you choose, only the business portion may be deducted. Choosing standard mileage might seem simpler. Track business miles and use them when calculating your deduction.
Choosing actual expenses and/or deducting additional expenses requires you to not only track business miles, but all other miles too. This allows you to determine what percentage of the vehicle’s use was related to those business miles and what was not.
Example: 4,000 business miles / 16,000 total miles = 25% business use
Further multiplying this business use percentage and the total expenses results in the allowable deduction.
Example: 25% business use x $9,000 in expenses = $2,250 tax deduction
You are free to decide which method is best for you. Keep in mind that the standard mileage rate is the same for motorcycles, small cars, SUVs, and big trucks. Consider the gas mileage and potential for costly repairs when you decide. Compare the standard mileage rate to your car’s average cost per mile. AAA’s study may give you some insight.
There is another catch. You MUST keep pristine records. This is one of those deductions that is audited frequently and many taxpayers fail due to poor record keeping. The mileage log must include:
Mileage logs may be kept on paper or electronically via an app (such as MileIQ). Choose whatever seems easier to you. Consistently, the best method is the one that is actually used!
IRS does not have many get out of jail free cards. When dealing with vehicle expenses, you get two. Evidence such as receipts are not required for:
While it’s best to keep records on an ongoing basis, it is possible to keep records for a sample period and apply that sample period to the whole year. To qualify for this loophole you will want to be able to prove that your sample period is representative of the entire year. To create a sample period, keep a solid mileage log for 3 months. Do this and you may find that you have built a habit. If so, keep going! However, with this sample and your ability to convince and auditor vehicle use is about the same the rest of the year you will meet Treasury Regulation 1.274-5T(c)(3)(ii)(A).
Be careful not to play fast and loose with these rules. There are a few situations where special attention must be paid and adjustments made. The most common are:
With a good system for tracking and some consistent discipline, you can enjoy the benefit of one of the largest tax deductions for small businesses and be able to back it up if the IRS asks. Talk with your tax professional for tips and tricks to make this an easy and consistent part of your record keeping.
In just ten minutes you can see if it makes sense for us to work together. No pressure, no sales tactics. Tell us about what’s working and not working for you. If we can help, we’ll schedule another time to go deeper with you.Schedule "Good Fit" Call
Keep reading. Never stop learning.
Don’t wreck your most valuable deduction
Uncle Sam's allowance for vehicle expenses is one of the least understood deductions. Of course car and truck expenses are allowable, but how are they maximized? What records are necessary to survive an audit?
Certified Financial Planner Board of Standards, Inc. (CFP Board) owns the CFP® certification mark, the CERTIFIED FINANCIAL PLANNER™ certification mark, and the CFP® certification mark (with plaque design) logo in the United States, which it authorizes use of by individuals who successfully complete CFP Board’s initial and ongoing certification requirements.
Check the background of your financial professional on FINRA's BrokerCheck Avantax affiliated advisors may only conduct business with residents of the states for which they are properly registered. Please note that not all of the investments and services mentioned are available in every state. Securities offered through Avantax Investment Services℠, Member FINRA, SIPC, Investment Advisory services offered through Avantax Advisory Services℠,Insurance services offered through an Avantax affiliated insurance agency. 3200 Olympus Blvd., Suite 100 Dallas, TX 75019 972-870-6000.
The Avantax family of companies exclusively provide financial products and services through its financial representatives. Although Avantax Wealth Management℠ does not provide or supervise tax or accounting services, Avantax Representatives may offer these services through their independent outside business. Content, links, and some material within this website may have been created by a third party for use by an Avantax affiliated representative. This content is for educational and informational purposes only and does not represent the views and opinions of Avantax Wealth Management℠ or its subsidiaries. Avantax Wealth Management℠ is not responsible for and does not control, adopt, or endorse any content contained on any third party website.
This information is not intended as tax or legal advice. Please consult legal or tax professionals for specific information regarding your individual situation. Investments & Insurance Products: Are not insured by the FDIC or any federal government agency- Are not deposits of or guaranteed by the bank or any bank affiliate- May lose Value
Links provided from this web-site are strictly for informational purposes and are not an endorsement or recommendation of the site, company, content, or its sponsoring organization by Avantax or its affiliates. Firm Name provides these links as a convenience to you, and has not tested any software or verified any information found at such sites. Risks are associated with the use of software and the information available on the Internet and you acknowledge and understand these risks before using any of these services.
Avantax Investment Services℠ and Avantax Advisory Services℠ are not affiliated with Wymer Brownlee Wealth Strategies.
Copyright © 2023 Core Financial Resources.