Welcome to the topic of Automobile Tax Expenses.
If you use a vehicle for conducting business, you can deduct certain automobile tax expenses from your tax bill. This is true even if you use the vehicle for personal and business needs.
Automobile Tax Expenses
The powers that behave historically written sections into the tax code promoting business activities. One of the traditional write-offs has always been the expenses associated with using a vehicle for business purposes.
The simplest automobile tax expense situation is one in which a vehicle is used entirely for business. For example, if you have a van used for a delivery service and nothing personal, all expenses associated with the van can be written off.
This is known as the exclusive use situation. For many small businesses, however, a vehicle will be used for both personal and business reasons.
Vehicle Used: Personal or Business?
Where you use a vehicle for both personal and business reasons, you can only deduct the automobile expenses associated with the business use. Keep in mind that driving to and from work is not considered business mileage, while driving from an office to meet a client is considered business mileage.
There are two methods for determining deductible automobile tax expenses. The first is a simple calculation known as the standard mileage deduction. The second is the actual expenses method. You can choose whichever deduction provides you with the biggest deduction unless you lease the car. With a lease, you must use the standard mileage deduction.
Standard Mileage Rate
The standard mileage rate deduction is a calculation wherein you multiply your total business mileage for the year by a figure provided by the IRS. The standard business mileage rate has gone down steadily since 2019, from 58 to 57.5 in 2020, to 56 in 2021. This is, once again, due to their determination of the fixed and variable costs of owning and operating a motor vehicle.
The actual cost expense option is exactly what it sounds like. It is the actual cost associated with using the vehicle for tax purposes for a particular tax year. Automobile tax expenses will include gas, tires, repairs, oil changes, registration costs, licensing, insurance and so on. In many cases, the actual expense deduction will end up being larger than the standard mileage deduction.
Regardless of the method you choose, you must document the automobile tax expenses. This means keeping a mileage book and receipts of anything you intend to deduct.
Also Read: Business Use of Home