A vehicle deduction refers to the expense of operating a motor vehicle for the benefit of a business. The deduction may be taken directly by a taxpayer or included as an expense of the employer’s cost of running a business. The deduction may be taken in a few different ways.
If the vehicle is company-owned and not personally used, all expenses to own and operate the vehicle may be deducted. In addition, insurance and depreciation expense of the car are allowed. Large corporations use this method for fleet vehicles.
For self-employed persons, or small businesses such as sole proprietors that use personal vehicles to conduct business, there are two ways in general to claim an expense in United States tax code. Using the actual expense method, the business owner tracks during the year all fuel, parking, road tolls, and similar costs incurred during business use of the vehicle. An owner is usually allowed to deduct a pro rata amount of the depreciation, insurance, and repair of the vehicle based on the company miles compared to the personal miles driven. Note that the regulations for vehicle deduction are subtle and that care should be exercised to avoid raising the risk of audits.
An easier method is the standard mileage rate method. In this method, the owner tracks the mileage driven for business purposes during the tax year. This number is multiplied by a rate supplied by the Internal Revenue Service (IRS) to determine the amount of the vehicle deduction. The standard mileage rate is also used by many corporations to reimburse employees who use their personal vehicles for business purposes. If a company reimburses the employee at a mileage rate less than the standard mileage rate, the employee may deduct the difference between the company reimbursement rate and the IRS rate multiplied by the miles claimed on company expense reports.
The standard mileage rate method must be applied the first year a particular vehicle is used for business reasons. The method cannot be applied if certain types of depreciation via the actual expense method have been previously claimed. Again, tax preparation consultation may be necessary for business owners to deduct these items correctly.
Many small-business owners share their vehicles between personal and business use. Often the business earnings roll up to the personal tax return of the owner. Taking an excessive vehicle deduction may be of questionable judgment. On the other hand, many self-employed people, particularly those in sales, spend a significant portion of their day driving from one appointment to another, and the vehicle deduction represents a major expense that should be reported to avoid unmerited taxes.