Business Driving Expenses - What's Deductible?
Deducting Use of Car for Business Purposes
Whether you have a car that has been purchased by your business or you are using your personal vehicle for business purposes, you need to know which expenses are deductible. The IRS regulations for deducting business driving expenses apply to employees and business owners in different ways.
Before you deduct car expenses, be sure to consult with your tax advisor. This article provides general information to get you started, but this tax subject is complex and your individual business situation is unique.
Business driving expenses, to be deductible, must be taken with caution. Before you take this deduction, make sure you can prove them to be business, not personal, expenses, and you will need to keep excellent records to show that these expenses are for business use.
Business driving is a legitimate business activity. If a business owner drives for business purposes, the cost of driving is deductible. If the business pays the driving expenses of its employees, those costs are also deductible to the business.
For business owners: How you include these business driving expenses in your business tax return depends on your business type and the type of tax return your business files. Most small business owners use Schedule C to report business profits and losses.
For employees: Employees who have business driving expenses that are not reimbursed by their employers may be able to deduct these expenses. They are entered on your business tax return as unreimbursed employee business expenses. The 2018 tax law has changed the way itemized expenses such as these are shown on your tax return, so be sure to check with your tax professional.
Business driving expenses can be calculated in one of two ways:
- Actual expenses, by keeping track of all deductible expenses relating to business driving, or
- A standard deduction. This deduction is determined by multiplying the standard mileage rate by the number of business miles driven.
The question of how to calculate mileage using the IRS standard mileage deduction or to record actual expenses for business use of your car/truck can only be decided on a case-by-case basis. (The standard mileage deduction changes every year.)
You can calculate mileage using both methods to see which is better for you, but be aware that there are some restrictions. For example, if you want to be able to use the standard deduction in future years, you must use it the first year of your business.
You cannot deduct expenses for commuting back and forth from your home to your business location.
If you are going back and forth to work, it doesn't matter if you are a business owner or an employee - the expenses are still commuting expenses, and they aren't deductible.
You cannot deduct commuting expense no matter how far your home is from your place of work. Consider it this way - everyone needs to get to work, employees and business owners alike, so this expense is not part of your business expenses.
What Records Do I Need to Keep for Car/Truck Expenses?
The IRS watches travel, entertainment, and car/truck expenses very closely to make sure they are really business-related and not for personal use.
To prove your business expenses, you must keep contemporaneous records. That is, the records are created at the time of the business event.
These records must include:
- Date and place of the expense,
- Amount of the expense, and
- Business purpose (a short description)
If you have a home-based business you drive for business purposes, you may be able to deduct driving expenses from your home to business locations.
First, you must be able to prove that your home is your principal place of business. In this situation, your home is your business, so technically you aren't commuting. Check with your tax professional on this.
Then you will need to keep good records on these driving expenses, as noted above.
This is a complicated question because there are many variables involved, including the length of the lease, miles driven, sales taxes, and depreciation. Read more about the factors in a car lease for business purposes to see if this is the best for you. Of course, you should talk to your tax adviser before you make any decisions.
This question should be at the top of the list because it's the most commonly asked question about business use of cars. You want to put an ad on your car and get a deduction for driving it around, as an advertising cost. The short answer: You can deduct the cost of putting an advertisement on your car (painting costs, etc.) but you can't deduct the cost of driving around this advertisement.