Business owners can deduct expenses for the use of a car for business purposes, for their own driving and for employee driving.
To qualify to deduct driving expenses for you or your employees, you must be able to prove that the trip was specifically for business purposes. Personal driving expenses, commuting expenses, and other non-business expenses are not allowable business driving expenses.
How to Deduct Expenses
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.
This section is for deducting driving expenses for paid by the business for employees and business owners and expensed on business tax returns. See below for employee driving expenses not reimbursed by employers.
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 must use the standard mileage rate 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, and
- 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:
- Interest expenses on a car loan, based on the percentage of time you use it for business purposes.
- Business-related tolls and parking fees separately from the standard mileage rate.
- The business part of local personal property taxes on motor vehicles.
Actual expenses. Your business can deduct actual expenses for business driving that can be deducted include:
- Depreciation (but see limits below)
- Vehicle registration fees
- Garage rent
- Vehicle titles.
Car Expenses for a Leased Car
If you lease a car for business purposes, you can deduct the part each lease payment that is business use using either the standard mileage rate or actual expenses. You must use the same method the entire time you have the lease.
Remember that these car expenses must be separated between personal and business use. You can base your expenses on miles driven for business vs personal use.
Depreciation Expenses for Business Driving
Generally, a car used for business purposes is an asset and the cost of that car is a capital cost, which means it can be depreciated over several years.
If you use the standard deduction, you cannot deduct depreciation on a business vehicle. You must change to the actual expense method in order to depreciate the vehicle. Special rules apply if you use your car 50% or less for business purposes.
Depreciation for business vehicles is complicated. Get help from your tax professional for depreciation, so you get the best deduction.
Driving as a Business Owner
The expense of driving a 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.
How you record the deduction for your business 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.
Employees Driving for Business
Some employers reimburse employees for the cost of driving, while others do not.
Effective in 2018 through 2025, the IRS has suspended the miscellaneous itemized tax deduction on Schedule A of personal tax returns. The unreimbursed employee business expenses were included in this category, so you can't take a deduction for business driving expenses that weren't reimbursed by your company.
Record Keeping for Taxes
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. Y
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.
For each expense, record the date of the expense or the date of the use of the car, your business destination, and business purpose.
All business driving expense records must be:
- Complete, showing all information including the date, location, mileage, actual expense, and business purpose.
- Accurate, meaning you should have backups for individual expenses.
- Timely, at the time of the expense, not created later.
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.
Non-Deductible Business Driving Expenses
You cannot take a deduction for business driving:
- For personal use of the car: 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.
- For commuting expenses (going back and forth to work from home).
- 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.
- For the use of your vehicle for 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 orother personal uses, you still can't deduct your expenses for thos uses."
You can find more details and definitions relating to car driving in IRS Publication 463 Travel, Gift, and Car Expenses.
Disclaimer: Every business is different, and business driving expenses are complicated. This information is intended to be a general overview, not tax or legal advice. Keep good records and discuss them with a tax professional before you complete your business tax return.