Almost all business owners think there are tax deductions associated with their automobiles. Most, however, are unsure about the specifics of the applicable tax deductions and what steps are needed to qualify. Common questions include: What expenses qualify as business expenses? How should I pay for my automobile expenses? What documentation should I retain? Should I purchase my car in the name of my business entity?
It is important to note that your commute to and from work does not constitute business use. Typical examples of business usage include trips to the bank for business purposes, trips to the office supply store, continuing education, marketing for the office, etc.
There are two methods you can use to figure your deductible expenses; the standard mileage rate or actual automobile expenses. For 2016, the standard mileage rate is 54 cents per mile. This rate is determined by the IRS and changes on an annual basis. To deduct the standard mileage rate, you must choose to use it in the first year the car is available for use in your business. Then, in later years, it may be possible to choose either the standard mileage rate or actual expenses.
The expenses used to calculate the actual expense method can include the auto loan or lease interest payment, fuel, oil and maintenance, auto insurance, and tolls. The expenses should be paid from the business checking or credit card account. Only the doctor’s automobile expenses should be paid for from the business.
Since most people use their car for both business and personal use, you must divide your expenses accordingly. The most common and effective way to differentiate between business and personal use is by maintaining a mileage log. You should track your beginning of year odometer reading, end of year odometer reading and mileage for all business trips during the year. There are also apps that can track your business mileage as well. The final percentage of mileage allocated to business use will determine the percentage of automobile expense deducted from the business.
You do not have to own your automobile in the name of your business to qualify for tax deductions. In some cases, your interest rate if your car was financed and your insurance premiums may be higher when the business entity owns the vehicle. Owning the vehicle in the business could increase business personal property taxes where applicable. There can also be liability issues associated with the automobile being a business asset as well.
To ensure that you receive the proper tax deductions for the business use of your automobile expenses, you should be organized and diligent with your tracking and record retention. You should retain the receipts and invoices of expenses for seven years. Have a plan for how and when you will record your business trips and always confirm you are using the proper account to pay for expenses.