Next to your home, your car is probably the most expensive investment you make. Car payments and maintenance aren’t cheap, either! So it only makes sense that you’re wondering if you can recoup some of your investment by claiming vehicle expenses on your tax return.
The answer? It depends on your situation (isn’t that always the case?) The IRS has many restrictions on the business use of a vehicle, and those restrictions have many exceptions. I’ve laid out some of the basic rules for you so you can determine whether or not claiming your vehicle is an option for you at tax time.
How does the IRS identify a “vehicle”?
A car, van, pickup, or panel truck.
What are transportation expenses?
These are “ordinary and necessary expenses” incurred when you, for example:
- Visit customers,
- Attend a business meeting held at a location other than your regular workplace, or
- Go from home to a temporary workplace that is not your company’s principal location.
The daily commute to and from your regular office is not deductible. The IRS considers this personal commuting expenses.
What if I’m on an overnight business trip away from home?
The IRS considers these travel expenses, and they’re reported differently. Your car expense deduction, though, is calculated the same way in both situations.
What if I use my car for both business and personal purposes?
You’ll calculate the expenses incurred for each by determining how many miles you drive for business and how many you drive for personal reasons.
I work in a home office. Can I deduct any driving expenses?
Yes, you can deduct the cost of driving to “another work location in the same trade or business.” Meet clients outside of your home or at their location? It’s deductible.
How do I calculate my deductible expenses?
There are two options. Using the standard mileage rate, you can claim 54 cents per mile (2016 tax year figure). You are required to use this method for the first year you use the vehicle for business purposes. After that initial year, you can choose between the standard mileage rate and actual car expenses. These include depreciation, oil and gas, insurance, and repairs.
Depreciation? Isn’t that difficult to calculate?
Yes, especially for cars. If you plan to take this kind of deduction, I suggest you let an accountant (like me) handle it for you. Depreciation is very, very complex, and sometimes requires more than one calculation method.
Can I take a Section 179 deduction for my vehicle?
Possibly, if you use the car for business more than 50 percent of the time — and only for the first year.
What kind of vehicle expense records do I need to maintain?
You know the drill here. If the IRS ever wants to examine your return, it will expect evidence like receipts, canceled checks, and credit card statements. You’ll need to document the date and location of every expense. You’ll need accurate mileage records (miles driven, purpose of trip, etc.) via a mileage log.
These requirements scream for some kind of organized computer log or written diary, along with a safe place for any paper receipts, bills, etc. There are tons of apps to help you with this. My personal favorite is MileIQ.
Where will I be reporting transportation expenses?
If you are self-employed or a single member LLC, you will report business-related vehicle expenses on Schedule C or Schedule C-EZ (Form 1040). Corporations and Partnerships should refer to their respective operating agreements. You may be reimbursed by your company or will be able to claim it as an Employee Business Expense via Form 2106. You’ll also want to complete a Form 4562, which is used to report depreciation and the Section 179 deduction.
Maintaining accurate records for car and truck expenses requires lots of detail. You need to make sure everything is in order in case the IRS wants to take a closer look. If you have questions about claiming your vehicle or what you might be eligible for, I can help! Shoot an email to firstname.lastname@example.org
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