Small Businesses Deducting Vehicle Costs

Taxpayers using a vehicle for business-related travel need to understand how they may claim vehicle travel expenses. They can either claim a deduction based on allowable business mileage during the year (Standard Mileage) or claim the business use percentage of actual vehicle expense during the year (Actual Expenses). The Internal Revenue Service makes your first-year deduction decision by only allowing you to use the standard mileage method. However, you may want to switch methods in the second and subsequent years.

Claiming Standard Mileage Expense

While some business tax deductions can be detailed and complicated, using the standard mileage deduction is rather easy. The Internal Revenue Service publishes the standard mileage rate each year. This rate is then applied to your business miles for the year to compute your mileage deduction.

The IRS standard mileage rate for 2019 is as follows:

• 58 cents per mile for standard use
• 20 cents per mile for use for medical or qualifying moving purposes
• 14 cents per mile when used in a charitable cause

It is important to note that the standard mileage rate includes fuel, maintenance, repairs, insurance, and licenses so you cannot deduct these expenses in addition to using the standard mileage rate. You can still deduct tolls and parking.

Deducting Actual Expenses

Many taxpayers may want to use the actual expense method instead of the standard mileage method. Under the actual expense method, you first divide your total annual business miles by the vehicle’s total annual miles to determine your business use percentage. You then multiply your actual expense during the year by the business use percentage to determine your deductible expense. Actual expenses include:

• Either lease payments or depreciation if you purchased the vehicle
• Fuel
• Vehicle repairs and servicing
• Tire purchases
• Insurance premiums
• Taxes and licenses

Documentation Requirements

The IRS requires you to document your business miles and to produce a mileage log and actual expense receipts during an audit. The mileage log rule applies whether you use the standard mileage method or claim actual expense. If you fail to keep a log, the IRS will deny your vehicle-related expense. Your log should include the starting address and the address traveled to, the miles and the business purpose. You should also keep oil change records to document your vehicle’s odometer reading.

Always remember that complying with tax law is important.  Tax agencies can deny a deduction if they find that the taxpayer overstated a deduction or failed to produce requested records to document a deduction. You also need to timely file and pay all taxes.

The preceding is solely intended for informational purposes and is not intended as legal advice.  It is important for business owners to consult with an experienced tax attorney or Certified Public Accountant.  Contact our office if you would like to further discuss your taxes.