When you own your own business, you are always looking for ways to save money. If you use your vehicle as part of your business operations, you may be able to get a refund depending on how much you use the vehicle. There are a few different ways you can declare a vehicle depending on which way will save you the most money.
According to TurboTax, there are two different ways you can calculate your vehicle’s deduction. You can either use the standard mileage rate, or you can use your actual expenses incurred while operating your vehicle for business purposes. The standard mileage rate is straightforward, and you will not have to keep track of as many records with this type of recording. The actual expenses method requires you to keep all of your receipts for the year to ensure that you get the maximum discount.
Standard Mileage Rate
The standard mileage rate is easy to calculate. You need to keep track of your total number of miles that you drove during the year and the total number of miles you drove for business purposes. The best way to track your business miles is to write down your mileage at the beginning of the day and the end of the day. You can deduct any miles that add to the functionality of your business. Examples include visiting clients, going to the bank, getting supplies, and meeting with business associates.
The standard mileage deduction does have its limitations. Travel from your home to your work is considered commuting and it is not tax-deductible. Going out of your way to get groceries or go eat may be considered personal mileage and is not tax-deductible. You can deduct your interest rate on your auto loan, property tax fees, registration, parking fees, and tolls with the standard mileage deduction. You just have to prove that you received these fees while working.
Actual Vehicle Expenses
Calculating your deduction based on actual vehicle expenses can be a more involved process than the standard mileage deduction. With this method, you can deduct any expenses that are related to your vehicle. These include gas, oil, maintenance, tires, registration, taxes, licenses, vehicle loan interest, insurance, lease payments, depreciation, garage rent, tolls, and parking fees.
After you figure out all of these expenses, you need to determine how much time you used your vehicle for work and personal use. You do this by dividing your total miles against your recorded business miles to get your business-use percentage. Then you take your total expenses and multiply it by your business-use percentage to get your total expenses for the year. It may seem daunting at first, but this method may get you a bigger deduction when it comes to tax season.
If you are planning on doing your deduction based on expenses, you need to be able to calculate the depreciation of your vehicle. Vehicle depreciation is built into the standard mileage deduction, but it is a figure you need to calculate while finding your actual expenses. Your vehicle’s depreciation is based on how much it cost to buy or lease it and how many miles you put on it in the current year. This loss in value is subtracted from how much the new vehicle cost, and you get your vehicle’s depreciation.
You can claim depreciation on any work vehicle that is from 1986 or newer. Depreciation limits mostly affect new luxury vehicles, according to the IRS. These rules are in place to help stop people from being able to exploit the tax code. If you plan on leasing your work vehicle, there are special rules for the depreciation of your vehicle.
How to Do Vehicle Deductions Based on Vehicle Ownership and Working Conditions
Vehicle deductions are fairly straight forward, but you need to know the rules to be able to do them efficiently. If you are self-employed, you can choose to do either method of tax deduction. Calculate both to ensure that you are getting your greatest deduction possible. If you own a single-member LLC, and you plan on filing a Schedule C, you are considered self-employed when it comes to vehicle deductions.
Vehicles Owned by Companies
Companies and corporations have to determine which tax deduction they are going to pursue based on which will grant them the biggest deduction. Companies also have to worry about the business-use percentage. If the vehicle was purchased for business use only, it makes their tax deductions straight forward. If the business vehicle is treated as income to the employee, then the company can deduct nearly all of the operating expenses of the vehicle.
Partnerships and LLCs follow many of the same rules as S Corporations, but there is one major exception. A partner or a member who has unreimbursed auto expenses as a requirement for the partnership or LLC agreement can claim the deduction on a Schedule E instead of a Schedule A. This is bypassed if the business opts to allow an employee to use a personal vehicle and just keep track of the miles for an expense reimbursement request.
Vehicles Owned by Individuals
If you are using a personal vehicle while working for a company, you typically declare your miles to the company, and they reimburse you at the standard mileage rate. The company will then take the amount that they reimbursed you and deduct it from the business’s expenses. This reimbursement cannot be deducted by the employee.
If you were not reimbursed by your company for any vehicle expenses before 2018, you can claim unreimbursed employee business expenses. You can alternatively just use the standard mileage deduction or the actual expenses deduction. After the year 2018, the unreimbursed employee expenses are no longer valid deductions.
How to Decide Whether to Buy or Lease a Vehicle
Buying or leasing a vehicle depends greatly on your situation. Buying is typically a better fit for people who plan on doing tens of thousands of miles over the year. Leasing is a great option if you are looking for less commitment in your next vehicle and if you want to upgrade often without carrying over any debt.
If you buy your vehicle, you can choose to do your taxes with either method. This means you can pick the method that will grant you the largest deduction year after year. You also do not have to worry about going over your allotted miles when you buy your vehicle, but you do have to calculate your vehicle’s depreciation.
Leases have special rules when it comes to tax deductions. You can choose to do either the standard mileage deduction or to calculate your actual expenses the first year you have your lease, but you cannot change methods for the lifetime of the lease. This means that once you choose one method, you are locked into doing your taxes that way on your lease for as long as you have the vehicle.
Another thing you need to do if you choose to figure out your actual expenses is to figure out how much you use your lease for business purposes. This is because leases don’t depreciate, so you cannot claim depreciation on them. Instead, you find your business usage percentage and deduct that from your lease payment.
To help balance out the deductions you get for owning or leasing a vehicle, the IRS came up with the annual income inclusion amount. The inclusion amount is a limit on how much you can depreciate a vehicle each year. When you buy a vehicle, you do this by limiting the depreciation. Since leases don’t have deprecation, you do this by limiting how much of the lease payment you can deduct each year based on income. The amount that can be deducted decreases every year of the lease for up to five years.
You should now be able to determine if buying or leasing is better for your situation. Leasing can be stricter in certain situations, but it does allow you to upgrade to a newer vehicle with less effort than buying allows. Buying your vehicle allows you to have complete control of just about every aspect of your ownership experience, but it does represent a larger commitment than leasing.
Choosing Which Method Is Best for You
Now that you have all of the information you need, you can make a well-educated decision on what kind of deduction you want to pursue. The standard mileage deduction is easy to use and can potentially get you the biggest savings if you drive a reliable vehicle with low maintenance costs. The actual expenses deduction takes more work, but it will often provide you with a larger deduction. This all depends on how thorough you are at keeping track of your spending while working. Either deduction can provide you with great results as long as you are diligent with your recording and reporting.