Part of running a business involves tracking expenses, which play into annual tax deductions. If your company owns vehicles, it's important to consider the various ways you can make auto deductions. It helps to use tax software for tracking all your business expenses so that financial data is all in one place. Here are essential auto deduction tips and tricks to know when you prepare your taxes. Please keep in mind that CarAccidents.com does not provide tax advice or tax-related services, so it is always best to consult a tax professional if you have questions about what deductions you can lawfully take and how to calculate those deductions.
Determine Vehicle Use for Business Purposes
Using a car for business allows for tax deductions based on either expenses or miles. In 2022 the standard mileage rate for business set by the IRS is 58.5 cents per mile, which is up 2.5 cents from 2021. For medical and moving businesses the rate is 18 cents per mile and for charities, it's 14 cents per mile. No deduction is allowed for personal travel or commuting to work. But once you get to work, you can start tracking deductible business travel.
Some of the various other deductions include expenses such as vehicle registration fees, insurance premiums, and lease payments. You cannot deduct interest from a personal car loan, but you can if you are self-employed or own a business.
To calculate the standard mileage deduction, multiply your business miles with the standard rate (58.5 cents). Keep in mind the IRS changes the standard mileage rate every year. Then add other expenses such as parking and tolls.
If you are involved in a car accident, it's possible to write off the insurance deductible, which is the amount you pay upfront when you file a claim, before the insurance company pays the balance. If, however, you are injured, be sure to discuss the situation with the specialized car accident attorneys from CarAccidents.com who can help you win the maximum possible compensation from insurance companies.
Choose Mileage or Expenses
You can use one of two different methods for deducting business trips: mileage or expenses. It's advantageous to choose the method that yields the higher result. The mileage method is measured in cents and is a fixed deduction. It includes a wide range of vehicle expenses from fuel to repairs. But it doesn't include interest on an auto loan. The mileage method usually works better for high-mileage and low-cost vehicle purchases. Generally, the mileage method can be used for any vehicle.
The expenses method, aka the actual method, lets you take all the same deductions as the mileage method but also includes depreciation. You'll need to keep accurate records including a mileage log. Expenses may include oil changes, purchasing new tires, and going through a car wash. The expenses method works best with low business miles for a large vehicle such as a truck or at least an average-priced vehicle. This method is usually the best choice for leasing a vehicle as well.
Certain travel expenses related to business purposes can be deducted from your taxes, although auto and travel deductions are two different types of write-offs. Your business can deduct travel expenses beyond the use of your company vehicles, such as tolls, lodging, and parking. Any form of paid transportation such as buses or taxis can be a business tax write-off if the travel is for business. Just keep auto expenses separate from travel expenses.
At one time most employees could write off mileage as a business expense. Now only certain employees are still allowed to deduct business travel, such as government workers. A deduction is no longer allowed when an employer fails to reimburse an employee for business travel, as per the Tax Cuts and Jobs Act of 2017. But if an employee is reimbursed, it will be taxable income that they can deduct as mileage expenses.
Donate Your Car to Charity
If you donate your vehicle to what the IRS considers a "qualified organization," you may be able to claim it as a deduction. The IRS has published its rules for vehicle donations on its website. Deductions are possible depending on what the charity does with the vehicle, such as improving its performance or selling it to a needy person.
One of the most valuable auto deduction tips and tricks ironically involves depreciation. For many businesses, vehicle depreciation can be one of the largest "actual expenses" for the tax year behind fuel. Depreciation can add up to a tax deduction of thousands of dollars per year.
The Tax Cuts and Jobs Act generated two major benefits for small businesses, which are bonus depreciation and higher annual depreciation limits. Whether a vehicle is new or used when it's purchased, you can write off $8,000 as bonus depreciation the first year. These deductions typically decrease over time. You can write off most depreciation, however, in the first three years after purchasing the vehicle.
The IRS provides guidance for depreciation under Section 179 on its website. To be eligible for this deduction, your business must be profitable and you need to select it since it's not automatic.
Keep Track of All Mileage Driven
Using your odometer, you can log business journeys and exactly how far you traveled. The IRS requires you to keep a log of mileage or actual expenses. Various software tracking tools are available to help you keep a precise log. Freshbooks Mobile is a widely used mileage tracking app. If the vehicle is used for both personal and business use, determine the percentage of miles driven for business to make proper mileage deductions.
Keep Track of ALL Repairs and Expenses
The IRS only allows a certain percentage of car repairs to be written off if you use your vehicle for work and personal use. But with strictly a business vehicle, you can write off all repairs using the actual expenses method. Save all invoices and receipts relating to auto repairs and maintenance to verify your expenses deduction. Some of the various types of repairs that are tax-deductible include oil changes, tune-ups, and installation of new parts.
Lease a Vehicle
If you lease a vehicle, you can write off monthly costs using the actual expenses method. The main limitation to leasing a car is that vendors typically only allow a maximum number of annual miles to control usage, which limits wear and tear. Some major advantages to leasing a business vehicle are you can avoid going into debt and you get access to a high-quality and reliable new vehicle at a low cost.
Vehicle usage accounts for significant business expenses but can be deducted against small business income on your tax return. Remember that commercial auto insurance is also tax-deductible. Another important point to note is settlements from vehicle accidents do not count as taxable income. Always consult a tax professional if you have questions about whether a deduction can be taken and how to calculate that deduction.
If you are involved in an accident, consultations with one of our auto accident attorneys are available during office hours in person or via Zoom. And, Zoom consultations are available after hours and on weekends as well.