As a business owner, there are over 250 different deductions that could help you save big in taxes every year. The Business Use Of Car tax deduction helps deduct business auto expenses from the year. This deduction alone could help you save thousands every year (depending on how much your drive for work).
There are a few methods to calculate your business’s auto expenses for the year. There is the Standard Mileage Rate Method, or you can use the Actual Expense Method. When taking the Business Use Of Car tax deduction, it’s important to understand how each is calculated and which will be more beneficial to help lower your tax liability.
Standard Mileage Rate Method
To make it easy on you, the IRS offers the Standard Mileage Rate Method. This method lets you deduct 56 cents per mile that you drive for business purposes instead of calculating all of your auto expenses individually. This method requires you to keep track of the miles that you drive for your business. This can include the miles when driving to your office, driving to look at property, driving to the office supply store, traveling for business, or any driving that would be required to help better your business. The mileage that you calculate cannot be for personal use.
For example – if you drive 10,000 miles in a year for your business, multiply 10,000 by 56 cents, you would get a tax deduction of $5,600.
To help you keep track of your mileage there are many free apps for your phone that are simple to use.
Actual Expense Method
Alternatively, you can use the Actual Expense Method. For the Actual Expense Method, simply track all of your car-related expenses for the year. This will include gas, oil changes, repairs, tires, insurance, registration, and lease payments. Multiply these expenses by the percentage of use that was for business, and you have your tax deduction. So, if you spent $10,000 running your car for the year, and used the car 80% for business, you would get an $8,000 tax deduction.
With the actual expense method it is very important to only calculate your expenses that were for business use. In the event of an audit, you must be able to prove the percentage of automobile use was in fact for business purposes.
Which method do you choose?
When looking at the example, obviously you would take the $8,000 with the Actual Expense Method vs taking $5,600 with the Standard Mileage Rate Method. Every tax situation is different. With your personal situation you would want to take a look at your Actual expenses vs your mileage and see which amount would be higher.
If you have questions about which method would be best for you, it is always recommended to work with your CPA on the best strategy.