Maximizing Vehicle Deductions for Your Business
When it comes to deducting vehicle expenses, understanding your options can help you maximize savings and ensure compliance. Here’s a quick guide to vehicle deductions for your business.
CHOOSING BETWEEN MILEAGE & ACTUAL EXPENSES
When deducting vehicle expenses, you must choose either the standard mileage rate OR actual expenses:
Standard Mileage Rate: This method allows you to deduct a set amount per mile driven for business (for 2024, the rate is $0.67 per mile). This rate covers all vehicle-related costs, including fuel, repairs, depreciation, and insurance.
Actual Expenses: With this method, you can deduct the actual costs of operating your vehicle for business purposes, including gas, repairs, insurance, and depreciation. However, you must calculate the percentage of total miles driven for business versus personal use. Tracking mileage is crucial because it helps determine the proportion of vehicle use that is for business, which is necessary to appropriately allocate costs to their business use.
Note: You must choose one method for the tax year and cannot combine both methods for the same vehicle.
RULES FOR SWITCHING BETWEEN DEDUCTION METHODS
First Year Choice: In the first year you use a vehicle for business, you can choose either the actual expenses method or the standard mileage rate.
Switching from Mileage to Actual Expenses: If you start with the standard mileage rate, you’re free to switch to actual expenses in a future year.
Switching from Actual Expenses to Mileage: However, if you start with actual expenses in the first year, you’re required to stick with actual expenses for as long as you use that vehicle for business.
BUSINESS VS. PERSONAL VEHICLE USE
Business-Related Driving: Includes driving to client meetings, picking up supplies, or traveling between work sites. These are all deductible.
Non-Business Driving: Commutes between home and your regular workplace, or personal errands are not deductible.
IMPORTANCE OF MILEAGE TRACKING
Accurate mileage tracking is essential, especially if there’s personal use of the vehicle. Regardless of the deduction method you choose, the IRS requires a record of business mileage to support your claims. This means tracking each business trip’s date, purpose, destination, and miles driven. Failing to keep these records could result in lost deductions if audited.
Various options are available for tracking business mileage. QuickBooks users can use the built-in mileage tracker in the mobile app to easily monitor mileage year-round. Download it on IOS or Android.
VEHICLE OWNERSHIP & REIMBURSEMENT POLICIES
How you handle vehicle expenses may also depend on whether the vehicle is owned by the business or the individual owner:
For S-Corps: If a vehicle is in an owner’s name but used for business purposes, reimbursements should be handled through an accountable plan. If the vehicle is owned by the business and used personally as well, personal use must be tracked and reported as taxable income on the owner’s W-2.
For Sole Proprietors (Schedule C): Business-related mileage or actual expenses can be reported directly.
Consulting Your CPA or Tax Preparer: We recommend consulting with your CPA or tax preparer to determine the best deduction method for your situation. They will ensure your deductions are maximized and compliant with current tax laws.
At MJ Webb Bookkeeping, we prioritize keeping your records accurate and well-organized to support effective decision-making with your CPA. We're here to simplify your bookkeeping so you can focus on running your business.