Most businesses rely on vehicles to get materials, people, and products where they need to be to meet customer needs. The cost of operating those vehicles can be deducted from taxable income. Businesses can generally use one of two methods to figure out their deductible vehicle expenses:
- Standard mileage
- Actual expenses
Calculating the vehicle expense deduction for your business using the standard mileage rate is relatively straightforward when the vehicle is used exclusively for business purposes. For 2019, taxpayers can deduct 58 cents for each mile of business use. This standard rate is set by the IRS based on an annual study on current costs of operating an automobile. If you elect to use the standard mileage rate, then you forego deducting the actual costs of operating the vehicle as those costs are embedded in that standard mileage rate. However, you can still deduct ancillary related expenses such as parking and tolls.
Businesses also have the option of deducting the actual expenses associated with the vehicle during the year. These expenses include:
- Depreciation (subject to some limitations and adjustments)
If your vehicle is used for both personal and business purposes throughout the year, you can still use the actual-cost method. However, the deductible amount will be limited to the percentage of business use. Typically, that percentage is calculated by dividing the number of business miles driven by the total miles driven in the vehicle.
How to Choose
In many cases, businesses can choose which method generates the highest deduction each year and calculate the expense accordingly. There are a few exceptions:
- To have the option of using the standard mileage rate in future years, a business that owns a car must use the standard mileage rate to calculate the deduction in the first year it uses the vehicle. Thereafter, the business can choose standard mileage or actual costs, whichever gives the better deduction.
- A business can only use the standard mileage method on a leased vehicle if it uses that method for the entire lease period.
- A business must make the choice to use the standard mileage rate by the due date of its return, including extensions. The choice can’t be revoked for that tax year once it’s made.
Track Costs and Miles to Make the Decision Easy
When it comes to vehicle deductions, the trick is to set up a system that tracks your miles and your actual expenses throughout the year. Many software packages that track business expenses connect to apps that can help you track deductible miles on your phone. (Just remember to engage the app each time you use your car for a deductible purpose.) Once the system is in place, your tax preparer can easily compare actual costs and standard mileage to determine the more advantageous number.
For more information on the deductibility of vehicle costs, please contact your CRI tax professional.