As I took a recent road trip with my family, I reflected on how much different our lifestyles would be without our cars. What was once a luxury has now become an important part of our lives and it has become an essential tool for most businesses. Despite the fact that vehicles are used every day by businesses, there is a lot of misunderstanding on how to treat the expenses associated with vehicles that can result in frustration as taxes are filed. Here are just two of the most common questions:
Do I need to track mileage?
The first step in deciding what vehicle expenses to include in your business is to separate the business usage from the personal usage. Business usage will include usage that is part of your operations or trade (such as visiting clients or jobsites) but does not include commuting (from home to work). I have often heard the question from clients, “Should we keep track of mileage?”. If there is any chance that personal use of the vehicle is taking place the answer is always yes! The goal is to make sure that you separate business mileage from personal use mileage. Tracking mileage used to be a huge chore with log books but with the development of apps and mobile devices it can be quite simple.
Can I deduct that?
Once the first step is being taken care of, figuring what is deductible becomes a lot easier. The IRS tax code allows two alternatives for deducting costs associated with a vehicle. I will briefly discuss them in this article.
Standard Mileage. For 2019 a taxpayer is allowed to expense 58 cents per business mile. This is allowed as a simplified method so that actual costs and receipts wouldn’t need to be kept. This rate is used to replace the actual cost of depreciation, lease payments, maintenance, gas, insurance, and registration. Other vehicle related expenses such as loan interest and parking fees would still be separately deductible.
Actual Expenses. This alternative is a little bit more intuitive. This includes the cost of the vehicle (through depreciation), gas, insurance, lease payments, licensing, registration, and repairs. This method requires keeping track of expenses and receipts. The actual expense that is deductible would be limited by the business usage percentage of the vehicle. Unless a vehicle is used 100% by the business it can’t simply be written off.
The taxpayer is free to choose only one of the two methods. However, there are some important considerations to keep in mind. If you choose actual expense in the first year of the vehicle, then you must follow it for all the years of the vehicle. You are not allowed to use actual expenses and then switch to standard mileage. If you choose standard mileage in the first year, you are free to choose between standard mileage or actual expense in following years.
If you are using a vehicle in your business or contemplating on purchasing one, then we recommend that you discuss your situation with us. As we understand the different ways vehicle expenses can and should be deducted, there will be less frustration when tax time comes.
Sam Clegg, CPA