Tax Deductions for Business Use of Vehicles
I often meet with new business owners who are trying to get up to speed on all the tax rules, regulations and nuances that relate to their new ventures. Typically, one of the questions they have regards the business use of vehicles and what tax benefits may be available to them from such use.
It's an important and potentially valuable question.
Essentially, there are two options when it comes to tax breaks for the business use of vehicles – the standard mileage rate method and the actual expense method. Which to use can be a matter of assessing which has the likelihood of giving you the most generous deductions, but also how much "hassle factor" you are willing to endure, which I'll address in a minute.
Before getting into the particulars of each method, first just let me say that with either one, good recordkeeping is a MUST! You have to keep detailed, contemporaneous (meaning at or close to the time it happened) records of your business use. Without it, if the IRS checks on you, they can wholesale deny any deductions at all, and there is little you can do. Believe me, I've seen it happen, and you don't want to be that taxpayer.
The records should indicate for each business use the date, number of miles driven, location and business purpose. Some folks use the old-fashioned pen and notebook method to keep these records, but now days there are also smartphone apps that can be set up to track your mileage automatically and you just fill in the details. Either way, keep a record, if you want a deduction.
Now that we've settled that matter, let's talk methods.
The standard mileage method is by far the simplest of the two. With this method, you simply multiply the number of business miles driven by the applicable standard mileage rate in effect for that year. For 2021, the rate is 56 cents per mile. This is actually lower than the 2020 rate, but with the rise in gas prices of late, we can expect an increase for 2022, I'm sure.
So, let's say you drive 15,000 business miles during the year. Your deduction will be the not to shabby sum of $8,400. You can add to this the cost of business-related parking fees and tolls, as well as the business use percentage of both personal property taxes on the vehicle and interest expense incurred on the vehicle's financing.
The actual expense method requires a bit more paperwork, although it sometimes can yield a greater deduction. As the name implies, you deduct the business use percentage of your vehicle's actual expenses incurred, including gas, maintenance and repairs, insurance, taxes and fees, etc. So, for example, if your business use percentage per your expertly kept records is 80%, you get to deduct 80% of all those expenses. The catch is, of course, you not only have to keep good records of your business use, you also keep receipts or other records of the expenses incurred.
To sweeten the deal a bit for the actual expense method, you also get to take a generous depreciation deduction on the vehicle. It's this deduction that makes this method worth the recordkeeping hassle for some taxpayers.
In general, the cost of the vehicle can be depreciated over five years using the IRS cost recovery tables. However, to prevent excessively high deductions in any one year on so called "luxury" cars, a yearly limit is imposed.
For 2021, this limit is $10,200 the first year of use, $16,400 the second year, $9,800 the third year and $5,860 for each succeeding year until the vehicle is fully depreciated. Additionally, if "bonus depreciation" can be taken, an additional $8,000 can be taken the first year, for a total of $18,200.
Note, however, that these limits assume 100% business use and must be decreased as the business percentage decrease. For example, if business use is only 80% for the year, the limit would be 80% of the above amounts.
There are some types of vehicles that have special and typically more generous depreciation rules, such as trucks, SUVs and vans with a gross vehicle weight of over 6,000 lbs. Also, special rules apply for vehicles that are leased.
So be sure to do your homework before deciding on which method you want to use or prior to purchasing a vehicle you intend to use for business purposes. And to stress again, keep good records! The deductions are too valuable to risk losing just because you didn't properly substantiate your business use.
Lane Keeter, CPA, is Office Managing Partner of the Heber Springs office of EGP, PLLC, CPAs & Consultants (a full-service financial firm with offices in Heber Springs, North Little Rock and Bryant) and past winner of The Sun-Times Reader's Choice Award for Best Accountant.