When calculating vehicle expenses and tax deductions, two methods are applicable. You can either use the standard mileage rate or the actual expenses incurred. The tax-deductible amount depends on whether the vehicle is sorely for business purposes or both for business and personal use. This majorly affects the small business owners who use their cars for running work errands. However, if the vehicle is purely for running business errands, all expenses are linked to the work.
To come up with the best deductions, you must first ensure accurate record-keeping so that you do not miss any details. Keeping a daily record of the trips made by the vehicle helps calculate mileage. Recording should also include the fuel consumption every time you visit the gas station. Ensure the vehicle’s odometer reads accurately for you to read the mileage at the beginning of every month. Your records should have up-to-date receipts and invoices of repairs, servicing, and other car expenses. It is beneficial to try both methods before committing to the one that gives you the most deductions.
Standard Mileage Rate
Calculating tax deductions using this method requires the mileage driven throughout the year and the mileage driven for business only during the year. Getting the year’s mileage is simple. You only need to record the odometer’s reading when you start using the vehicle for business purposes and record the reading at the end of the year. Next, you must identify when you used the car for personal errands and business use. Mileage for business use includes going to the bank, meeting a client, going for business supplies, or attending a business meeting. However, going to the mall, making personal visits, driving to and from home, and doctor’s appointments, are personal errands.
The current standard rate given by IRS is 56 cents per mile. When deducting, you can include additional expenses like interest on the vehicle’s loan, parking, and toll fee, if you can prove their link to the business. This method allows the car’s depreciation and calculates it at 25 cents per mile. However, it is essential to note that you should calculate depreciation for the first year using the standard mileage rate, but you can use either of the two methods for other years.
Actual Expenses Calculation
This method calculates using the actual costs and expenses. It involves gas, oil change, repairs, registration fees, toll, parking fees, vehicle loan interest, insurance, lease, and rent payments. You have to document all these expenses accurately and add them to get the whole year’s expenses. If the vehicle is not very old, you can work in the depreciation rate to the math. The second step is to identify the number of miles the vehicle went for business errands and get the percentage from the total mileage for the year. Once you get the portion of the vehicle’s use for business, calculate that percentage from the total expenses to reach your full deductions.
For example, assume your total actual expenses add up to $5000, and your business mileage is 16200 miles out of 18000 miles. The percentage for business traveling comes to 90%. Therefore total deductions would be 90% of the $5000, which is $4500. However, it is essential to note that the standard mileage rate would give better deductions in such an instance. Calculating 0.56 of 16200 would give deductions worth $9072. Therefore, as earlier stated, your vehicle’s consumption will determine which method suits you best to save you money.
How to Deal with Ownership Matters
Ownership of vehicles can complicate the calculations if you do not know how to handle it. Personal cars have no significant conflicting estimates. However, issues arise when the vehicle belongs to a corporation, but the employee is driving it, or an employee uses their vehicle for the corporation’s work. It is also essential to know how to deal with a leased or rented vehicle.
a) Corporation vs. Employee Ownership
If the employee uses their personal vehicle for work, they should submit a request for reimbursement, and the corporation will pay the required amount according to the standard mileage rate. They will then deduct the expenses paid for the vehicle from their accounts. However, this amount should not reflect as a taxable amount to the employee. If an employee uses a company vehicle, the firm calculates deductions either by the business-use only or all the mileage according to the agreement.
b) Lease
If you use a leased vehicle, you can use either of the two procedures to get your deductions. If you use the standard mileage rate for the first year, you will have to continue using it for the rest of the period. However, this method does not include the lease payment in the deductions. You can add the lease payment but not depreciation calculations when using the actual expenses method.
c) Income Inclusion
In a measure to equalize leasing and vehicle ownership, the authorities added an income inclusion amount to subtract from the deductions in case the value of the vehicle is above $51000. The amount varies depending on the number of years you are leasing the vehicle and the lease amount. Therefore, the more tax years you rent the car, the higher the amount to subtract as income inclusion.
In conclusion, knowing how to calculate deductions and which method suits you will save you money in the long run. The standard mileage rate will give you the highest deductions if your vehicle is more economical. However, if it is not as economical, the most appropriate method would be the actual expenses to favor you. All you need to do is get your record correctly and find out how best to save your money through tax deductions.
