Can you write off your vehicle?
The answer is yes… but there are some things you should know before learning how to deduct your vehicle.
As a business owner it’s exciting to think about deducting all these expenses. However, the IRS is very good at making things complicated. It can be hard to know what specific expense can be deducted and what they won’t accept. I won’t go into all the definitions that make the tax code so ridiculously long, because that would suck for both of us.
There’s an easier way to think about your expenses.
The best rule of thumb when deciding if any expense is deductible on your taxes, is to ask yourself, “Is this expense somehow related to my business?”
So, as we said before about your car or truck, yes, any expense from using it for business can be deducted. The fun part is calculating how much is business related verses personal.
And of course, the IRS has graciously given you some guidelines, which I will put in better terms for us to actually understand how to deduct your vehicle.
There are two ways to calculate your deduction.
Actual expenses or standard mileage deduction.
You must choose one. You cannot do both. Only one.
Option 1 – Actual Expenses
Start by adding up everything you spend on your vehicle, like gas, oil changes, repairs, maintenance, tires, basically anything that goes directly to your car.
If you are leasing your car, then that monthly payment is included as an expense.
However, if you have purchased the car and are making payments on a loan, then only the interest part of that payment is an expense, NOT the principal portion. The reason is because you haven’t paid any taxes on the loan money you are receiving for the car.
Now that you have an expense total for your car, you need to apply the business use percentage to that total because the IRS assumes your vehicle is for personal use unless you can prove otherwise. The business use percentage of your expenses is the part that you can prove.
The only way to calculate that percentage is to divide your business use miles by the total miles driven on the vehicle for that year. This will give you a percentage that you then apply to the total expenses to get a business use number that you can deduct.
I told you this was fun!
Also, if you didn’t catch it, you have to track your miles in order to find your business use percentage.
Option 2 – Standard Mileage Deduction
This is a lot more straight forward.
Multiply your business use mileage by the IRS mileage rate. That’s it!
The mileage rate changes every year so you will need to look it up or ask your tax professional. For 2020, the mileage rate is 57.5 cents per mile driven for business use.
So, for this option you need to track your miles also.
No matter which option you choose, you need to track your miles!
Start now and get in the habit of tracking them. It will make it much easier come tax season to already have that information.
Just a reminder that all miles driven to and from a business-related outing you will want to include. A conference, business lunch, partner meeting, business purchase of any kind, all will be included.
Also, you DON’T have to have a logo or any business name on your vehicle nor do you have to have it titled in the business name. Neither of those matter to the IRS. Just the miles you used it for business purposes.
We have created a spreadsheet just for tracking miles. Just plug in the business miles you drive each day and that’s all you need to do.
Schedule a FREE Planning Session to discuss how we can save you even MORE on your taxes.
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