Business owners can deduct expenses for the use of a car for business purposes, for their own driving, and for employee driving. The car can be owned by the business or employee, and you can use a standard mileage or actual expenses deduction to determine the amount of the deductions.
This article discusses the two ways to deduct business driving expenses, and limits and restrictions on these deductions.
- A small business can deduct expenses for employee and owner use of a car, but only for business purposes.
- Personal driving expenses and commuting expenses aren't deductible.
- You can deduct driving expenses by detailing actual expenses or multiplying the Internal Revenue Service (IRS) standard mileage rate by your business miles for the year.
- You must be able to prove that the expenses were business related, by providing at-the-time records.
Who Can Deduct Business Driving Expenses?
Your small business can deduct all business driving expenses for all types of vehicles driven by business owners and employees. If your business owns the vehicle, you can also deduct depreciation expenses, but only if you use the vehicle more than 50% of the time for business purposes. For example, if you use a company car 60% of the time for your business, you can deduct 60% of your driving expenses for the year.
Some employers reimburse employees for the cost of driving, while others do not, but employees can no longer deduct their unreimbursed expenses for business driving. Effective through 2025, the IRS has suspended the miscellaneous itemized tax deduction on Schedule A of Form 1040. Unreimbursed employee business expenses were included in this category, so employees can't take a deduction for business driving expenses that weren't reimbursed by their employer.
What Counts as Deductible Vehicle Expenses?
As a small business owner, you can deduct the actual expenses of operating a car or truck (detailed below) or you can take the IRS standard mileage rate to calculate the deduction, multiplying this rate by your business miles for the year. You can take these deductions even if you used the vehicle for hire, like driving a taxi or for Uber or Lyft.
Depreciation on a company-owned vehicle is deducted in a different way from other expenses. Vehicles are assets and the cost of their use is depreciated over several years. The IRS considers vehicles as listed property, which means they can be used for both business and personal purposes.
You can only depreciate a company car if it's owned by your business and used more than 50% of the time for business purposes, and you can only depreciate the part of the cost that's business-related. You must use the actual expense method in order to depreciate the vehicle.
If you lease a car for business purposes, you can deduct the part of each lease payment that is business-use using either the standard mileage rate or actual expenses. However you must use the same method the entire time you have the lease.
You must separate business and personal use of the car, whether it is your personal car or a business-owned car. Personal expenses are never deductible.
Expenses for commuting (driving back and forth to work from home) aren't deductible, because they are a personal expense.
You dan't deduct use of the car to transport business material while commuting or to make business phone calls on your cell phone. The IRS says these circumstances still don't make the expenses deductible because you are using the car primarily for commuting.
You can't deduct use of your vehicle as advertising, like putting a sign on your car and driving around. The IRS specifically says:
"Putting display material that advertises your business on your car doesn't change the use of your car from personal use to business use. If you use this car for commuting or other personal uses, you still can't deduct your expenses for those uses."
The Two Deduction Methods
The IRS allows two different ways to deduct expenses for business driving: actual expenses and a standard mileage deduction. Which expense deduction method you choose depends on your situation and on IRS requirements and limitations.
Standard Mileage Allowance
The standard IRS mileage deduction for business driving, which changes every year, is the easiest to use. You just multiply the business miles driven for the year by the rate for that year and use that amount on the appropriate tax form.
If you choose the standard mileage rate for a car you own, you must use it the first year you use a car. If you want to use this method for a leased car, you must use it for all years of the lease.
The IRS has some requirements for using the standard mileage allowance:
- You must not operate five or more cars at the same time, as in a fleet operation.
- You must not have claimed a depreciation deduction for the car using any method other than straight-line.
- You must not have claimed a Section 179 deduction on the car.
- You must not have claimed the special depreciation allowance on the car.
- You must not have claimed actual expenses for a car you lease.
In addition to taking the standard mileage deduction, you can deduct several other driving expenses separately from the standard mileage rate:
- Interest expenses on a car loan, based on the percentage of time you use it for business purposes
- Business-related tolls and parking fees
- The business part of local personal property taxes on motor vehicles
Your business can deduct actual expenses for business driving including:
- Vehicle registration fees
- Garage rent
- Vehicle titles
You can also deduct depreciation each year, as described above, but depreciation is complicated. Get help from a licensed tax professional for this part of your business tax return.
Remember that these car expenses must be separated between personal and business use before you calculate your business driving expenses for the year.
Keep Good Records
To be able to deduct car expenses for business driving, you must be able to provide proof of business driving. This is true even if you are taking the standard deduction.
You must also be able to show the amounts you paid for business driving, You must keep a written record, such as receipts, canceled checks, or bills.
Keep a record of:
- the cost of the car and any improvements
- The date you started using the car for business
- The mileage for each business use,
- The total miles for the year
If you and your employees do a lot of business driving, you might want to consider getting a business driving app to make tracking easier.
All business driving expense records must be accurate and timely (created at the time of the expense). Be sure your records are complete, showing all information including the date, location, mileage, actual expense, and business purpose.
Frequently Asked Questions (FAQs)
What's the current standard mileage deduction rate?
The IRS sets an optional standard mileage rate for business driving each year, based on costs of operating a vehicle. The 2021 mileage rate is 56 cents a mile driven for business use, down 1.5 cents from the 2020 rate.
The IRS also sets two other driving rates. The other 2021 driving rates are:
- 16 cents a mile for medical purposes and for moving expenses for active duty military
- 14 cents a mile for driving in service of charitable organizations
What expenses can you deduct if you borrow a vehicle for your business?
The expense of driving any car for business purposes (not commuting or other personal use) is a legitimate business expense, and you can deduct these expenses on your business tax return. If you borrow a car to use for business driving, the only expense you cannot deduct is depreciation.
Depreciation expenses are deductible for vehicles and other big-ticket purchases (called capital assets) over the time the vehicle is owned by the business. You can't deduct depreciation because your business doesn't own the vehicle.
Where do you deduct business vehicle expenses?
Small business owners can deduct business vehicle expenses on Schedule C, the schedule used to calculate profit or loss from a small business. Enter the total of your business driving expenses for the year (minus depreciation) on Line 9 Car and truck expenses. You can calculate the total by using either the standard IRS rate for the year or actual expenses.
You must also provide more information about your business driving for the year in Part IV of this form.
Depreciation expenses for cars owned by your business are calculated in a different way from other ongoing expenses. Depreciation must first be calculated using IRS Form 4562 Depreciation and Amortization. This expense is included in category of listed property, and you must use the vehicle more than 50% of the time for business purposes in order to take a depreciation deduction for the year.