CAR AND TRUCK EXPENSES DEDUCTION
For the next article in my Small Business Series, I want to talk about some of those expenses a small business can deduct when it comes time to file your tax return.?To start off with, let’s talk about the car and truck expenses.?This one can be worth quite a bit of money depending on your business model.?
It might sound straightforward, but by now you know it’s probably safer to assume that just about everything is more complicated than it sounds.?On the surface, the car and truck expense deduction allows businesses to deduct the cost of owning and operating a vehicle in the course of its business. But, there are two ways to do this, and not everything you do with a business car is considered business use.?
Business Use
So, let’s break it down a little bit.?To take a car and truck expense deduction, the expenses have to be connected to business use, not personal.?But a lot of small business owners use their vehicles for both personal and business so how do you decide what is personal and what is business??Well, you might want to talk this through with a tax professional, but essentially you use the “ordinary and necessary” rule.?And what’s nice about this rule is you use it for both deduction methods, which we will discuss in just a minute.
To apply this rule, you have to ask yourself whether the vehicle expense or the miles driven were both ordinary and necessary to further your business purposes.?An ordinary expense is one that is common and accepted in your industry.?A necessary expense is one that is helpful and appropriate for your trade or business.?
Remember, the expense does not need to be indispensable to be considered necessary, just helpful and appropriate.?Meaning, does it further the purpose of your business??Here’s an example.
If your business is consulting for very rich clients who would expect you to have a Rolls Royce, Lamborghini, or Porsche and might not do business with you otherwise, then it might be appropriate to own and use that expensive car in your business.?And, since they are expensive to upkeep, any of the expenses used to maintain that expensive car for the benefit of gaining new clients would be deductible.
The Two Methods
But as I said before, there is more than one method for taking this deduction.?Also, this is one of the rare places in the tax code where you can choose which method is more beneficial for you.?If you would want to deduct car or truck expenses for your business you can use either actual expenses or a mileage log. ?
Actual Expenses
If you decide to deduct actual expenses, you essentially deduct all of your expenses connected with the business use of your vehicle. These include items such as:
As long as they are ordinary and necessary to your business, you can deduct those expenses.?If you are like most small business owners and use your vehicle for both business and personal reasons, you might have to talk to a tax professional and figure out a reasonable percentage of the expenses you can deduct.
Just remember, if you are going to use the actual expenses method, you will need to keep all of your receipts.?It also doesn’t hurt to make a little note on the back of the receipt describing what the expense was for.
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Standard Mileage
For some of us, the standard mileage deduction is better.?Why??I’ll get to that in just a minute.?But first, what is the standard mileage deduction?
Essentially you take all of the miles you drove for business purposes during the tax year and you claim a deduction for each of those miles.?For 2019 it was 58 cents/mile and for 2023 it is 65.5 cents/mile.?As you can see, the rate changes every year so the deduction will change every year.
If you use the standard mileage method, you cannot deduct your other expenses that I mentioned previously, with two exceptions.?You can still deduct tolls and parking fees if you use the standard mileage deduction, but all the others are considered included in the standard method.?
Which Method Should I Use?
So, this brings us to which method would be best for you.?Honestly, it depends on your situation, and it would probably be best to talk to a tax professional before you decide.?You might get a better deduction with actual expenses, or it might be better with the standard mileage.
For example, you might have an old car that requires a lot of maintenance.?You might have a car that guzzles gas like I guzzle Coca-Cola, or maybe your expensive car needed repairs during the tax year.?These might be good reasons to use the actual expenses.?
However, you might have a really dependable eco-class car that barely uses any gas, doesn’t need maintenance, and didn’t break down during the tax year.?You might be better off taking the standard mileage deduction.?Either way, I always tell clients to keep track of both methods.
If you keep track of both your miles and your expenses, you can give yourself the option of choosing the best method for you when tax season does come around.?If this sounds hard, it doesn’t have to be.?Here’s an example of a simple log you can keep in your car and fill out as you go.
What if I Didn’t Keep Records?
Although it is better to keep records as you go, if you haven't, it’s not a deal breaker.?In fact, most of my clients have not kept records.?If this is the case, we will have to go back and create a narrative from whatever record you do have such as bank or credit card statements.
If this is the case, I would most likely have to use the standard mileage deduction, but you never know what you can find in your records until you start looking.?If you want to talk to one of our knowledgeable tax attorneys about your situation, please feel free to schedule a consultation with our office.