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Auto Expense Tax Deductions for Your Small Business

The auto expense deduction could be incredibly valuable for your small business, but you need to know what auto expenses or miles are deductible so that you can take full advantage of it without taking more than you are eligible for.

If you want to know what expenses or miles qualify for an auto expense deduction, why small business owners are typically at an advantage when it comes to this deduction and how you could save thousands of dollars in taxes by maximizing it, keep reading.

Business Miles

There are two different options for calculating how much your auto expense deduction is worth, which I discuss later in this post, but the deduction under both options is based on the same thing: business miles.

If your small business is home-based, you are at a big advantage because all of the miles you travel for business can likely be treated as business miles.

By home-based, I mean your home is your principal business location and you qualify for the home office deduction.

If this describes you, all of the miles you rack up visiting customers or clients, traveling to coffee shops to work or doing anything else that has a business purpose can be classified as business miles.

If you travel to an office or other work location daily or regularly and don’t qualify for a home office deduction because your home office is not your principal work location, determining business miles becomes more complicated.

You can’t count miles from your home to your office or other regular work location as business miles.

But if you travel from your office or regular work location to visit a client, customer or somewhere else business related, these miles are considered business miles.

Or, if you go from your home to a client, customer or somewhere else, these miles are business miles.

A visual might help!

To properly track your mileage you want to keep a tally of your total miles and your business miles.

It is a good idea to record your car odometer’s reading at the beginning and end of each year if you are primarily using one vehicle for your business.

Then, develop a method for keeping track of your business miles.

You can use an app, like MileIQ, log your miles in a spreadsheet or keep a small journal log in your car and manually log them.

Once you know how many total miles and business miles you logged, you  (or your tax preparer) can properly calculate your auto expense deduction.

Calculating the Deduction

There are two options available for calculating your auto expense deduction: standard mileage or actual expenses.

Both options require that you keep a log of your business and nonbusiness mileage and save documentary evidence to support any auto deduction (i.e. receipts).

Standard Mileage

The easier option is the standard mileage option.

Determine your total business miles and multiply this figure by the standard mileage rate for the year, which in 2017 is 53.5 cents per mile.

Choosing the standard mileage rate is in lieu of deducting actual auto expenses, which include:

  • Depreciation
  • Lease Payments
  • Fuel
  • Routine Maintenance
  • Tolls
  • Insurance
  • Garage Rent
  • Parking Fees
  • Registration Fees
  • Repairs
  • Tires

If you choose the standard mileage option, you can still deduct interest on a vehicle loan.

You can also deduct parking fees and tolls (except fees for parking at your office or regular place of business).

The standard mileage rate is pretty generous and usually makes sense for business owners who travel a fair amount of miles.

Actual Expenses

The other option for calculating your auto expense deduction is to deduct the actual expenses you incur.

The full list of actual auto expenses is above in the standard mileage section of this post and includes depreciation, lease payments and fuel.

However, there are several caveats when it comes to choosing to deduct actual expenses.

First, you can only deduct actual auto expenses that are associated with business mileage.

The easiest way to calculate this is to track all of your auto expenses and deduct a percentage of them based on your business mileage.

If you travel a total of 10,000 miles in a year and 8,000 of these miles are classified as business miles, you can deduct 80% of your total auto expenses.

There are also limits on how much depreciation you can take each year, which is intended to prevent you from buying and deducting what the IRS considers a “luxury automobile”.

The same goes for limits on total lease payments you can deduct each year.

Typically, if you choose to deduct actual expenses, your deduction will be significantly higher the first year or two that you own your vehicle because of the way the depreciation deduction is calculated.

However, once you choose to deduct actual expenses for a vehicle, you are locked into deducting actual expenses for as long as you own that vehicle and use it in your business.

The depreciation rules and limitations are more favorable if you drive a van, truck or SUV.

As you can see, choosing between the standard mileage method and deducting actual expenses isn’t always straightforward.

It may warrant a discussion with your personal tax advisor, but hopefully this information provides you with some guidance regarding the kinds of questions you should consider asking.

Next Steps

I hope this helps you gain a better understanding of the auto expense deduction for your small business.

If you want to stay up to date with my best small business tax tips and advice, pick your poison: sign up for my EMail list, like my Facebook page or follow me on Twitter.

Also, I’ll be answering questions throughout 2018 on the new tax bill.

If you have any questions about the new tax rules, check out this post and then head over to the Q and A page to submit your question.

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