How to Properly Deduct Business-Related Vehicle Expenses

How to Properly Deduct Business-Related Vehicle Expenses

Kohl & Company CPAs
Sep 02, 2020

Here’s what you need to know about deducting business-related vehicle expenses and how to do it properly.

Businessman in suit driving carIf you have a vehicle that you drive for business purposes—or company-owned vehicles that your employees drive for work—you can quickly rack up a lot of miles. Driving to business conventions, meeting with clients, visiting job sites, and other travel puts a lot of wear and tear on a car, which means a lot more expenses than simply putting fuel in the car; and all those expenses can be deducted, when done properly. Here’s what you need to know about deducting business-related vehicle expenses and how to do it properly.

Taking the Standard Mileage Rate

There are actually two options available to you when it comes to deducting business vehicle expenses. The first is to take the IRS’s standard mileage deduction. For 2020, that deduction would be $0.575 per mile driven. If you select the standard deduction option, don’t think that this works like the standard deduction on individual tax returns, where you don’t have to itemize anything; you’ll still need to keep detailed records of your business-related mileage.

To do this properly, we recommend creating a chart or spreadsheet that allows you to records all of the following information for every business-related trip you make:

  • Date of the trip
  • Your destination
  • The purpose of the trip (e.g., meeting a client or traveling to another job site)
  • The reading on the odometer before you begin your trip
  • The odometer reading after your trip
  • The total miles driven

We also recommend adding up your business mileage totals every week, as well as having a space for calculating the total miles driven for business purposes throughout the year. This way, you can easily deduct the correct number of miles when taking the standard mileage rate on your tax return.

Please note that you can only deduct miles driven for valid business purposes. This does not include driving between your home and office or taking your lunch breaks. Additionally, there are certain instances in which you may not be qualified to use the standard mileage rate deduction. Please consult with one of our CPAs to find out if you qualify to use this deduction format before you file.

Deducting Actual Car Expenses

Your second option for deducting vehicle expenses is to deduct the actual cost of vehicle upkeep and maintenance throughout the year. This form of deduction requires detailed records of your business vehicle expenses. This means you’ll need to keep receipts for:

  • Fuel
  • Oil
  • Vehicle registration
  • Insurance
  • Tires
  • Vehicle repairs
  • Tune-ups and other maintenance

If the vehicle you’re deducting for is exclusively used for business purposes, then you should be able to deduct the full amount of these expenses. However, most business vehicles accumulate at least a few miles of personal use (such as driving to and from the office), which means you’ll only be able to deduct a percentage of the vehicle’s expenses.

For example, let’s say that you own and operate a small AC repair company. You have a van that you drive to and from your office, as well as to clients’ homes. This year, you put 50,000 miles on that van, with 5,000 of them being your daily commute. This means that you can claim 90% of your vehicle expenses as a deduction.

Because of this, deducting actual vehicle expenses does require you to also maintain a detailed driving record as described in the previous section, in addition to keeping receipts and maintaining expense logs. We recommend scanning or taking pictures of your receipts and keeping them in a digital folder for vehicle expenses to avoid losing these important records; without the receipts, the IRS can deny your deduction of these expenses.

There are also rather strict requirements for the types of vehicles that qualify for this form of deduction, so it’s important to consult with a CPA on these matters.

Determining the Best Form of Deduction

If you qualify for both forms of deducting business vehicle expenses, you might wonder which option is best for your business. For the majority of people and company, the standard mileage rate will typically yield a higher deduction amount. However, this is not always true, and there may still be other benefits to deducting the actual expenses.

If you hope to use this deduction to your business’s greatest advantage, it’s important to work with an accountant. We can help you to determine which form of deduction is best for your company, assist in proper record maintenance, and of course, get your business return filed properly, using every deduction we can find for your business. Give us a call to learn more about how our business tax preparers can help your company grow!