How business owners can deduct car expenses on taxes

Business owners can deduct car expenses for vehicles used exclusively in a trade or business. If using a car for both business and personal purposes, the business owners are allowed to deduct the business mileage but must keep record of business and personal use. Commuting expenses between the business owner’s home and a business location, are not deductible.
Vehicle expenses that can be deduct on business taxes:

  • Depreciation
  • Lease payments
  • Gas
  • Tires
  • Repairs
  • Tune-ups
  • Insurance
  • Registration fees

When filing your business taxes and claiming the vehicle deduction you may only use actual vehicle expenses or mileage.

New Updates for Business Tax Vehicle Deduction

To qualify to use actual expenses, the business owner must use the actual expense method for the first year placing the vehicle in service for business use. The business standard mileage rate cannot be used for a vehicle after using any depreciation method other than straight-line, or after claiming a Section 179 deduction for that vehicle. You use the business standard mileage rate for vehicles used for hire, such as taxicabs, but may not claim the business standard mileage rate for more than four vehicles used simultaneously.

For 2021 taxable year the new standard mileage rate is:
.56 per mile driven for business
.16 per mile driven for medical/ moving purposes
.14 per mile driven in service of charitable organizations
Keep in mind, whenever filing business taxes you can deduct the following no matter what vehicle deduction method you use:

  • Interest on car loan
  • State/ local taxes
  • Parking fees
  • Tolls

Business Tax Vehicle Example

Business owners can choose to use the standard mileage rate or actual vehicle expense method. As an experienced tax preparer, I would advise businesses that have minimal mileage to use actual expenses for first 4 years the vehicle is placed in service and depreciate on a straight-line method. On the fifth-year start keeping a mileage log then compare mileage to actual expenses and take the greatest deduction. You may go between the two options as long, as you have not had any bonus depreciation or 179 deductions on your vehicle.

Recordkeeping Requirements for Business Tax Vehicle Deduction

It is essential that businesses keep accurate documentation of the specific business use when taking the standard mileage deduction. I recommend to my business tax clients to use an app that keep tracks of business trips- it’s easy and typically free. If the taxpayer uses his or her car for both business and personal purposes, the app keeps track of both travel mileage and generate a report to provide to your tax preparer.

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