Do you drive your vehicle for business purposes?
If so, you are likely eligible for a tax deduction or reimbursement from your business.
When Can you Deduct Vehicle Mileage or Expenses on Your Taxes?
The IRS allows you to deduct vehicle mileage or expenses from your taxes if you drive your vehicle for business use. If you drive your vehicle for both personal, and business use, you need to pay close attention to separate and record the two uses.
What is Business Use?
The IRS provides a helpful list of activities that qualify as “business use”. The list includes:
- Travel between business offices
- Business errands
- Travel to business meals
- Travel to business entertainment
- Drives to the airport for business travel
- Customer visits
- Travel to temporary job sites
- Travel to job interviews
- Tolls and parking during business trips
Other activities could count as business travel. To qualify, you need to show a written record with a legitimate business purpose for the travel.
What Doesn’t Count as Business Travel
Travel to and from your ordinary workplace does not count as business travel. This counts as personal use. Personal use of your vehicle is not tax deductible.
How to Deduct Vehicle Use for Taxes
You can claim a deduction for business vehicle use through one of two methods:
- Standard Mileage Rate, OR
- Actual Expenses
What is the Standard Mileage Deduction?
The standard mileage rate method allows you to calculate your tax deduction based on your mileage driven for business purposes.
The standard mileage rate for 2018 is 54.5 cents per business mile.
In other words:
Miles driven for business use X $0.545 = Mileage tax deduction
If you drive your vehicle for both personal use and business use, you can only deduct mileage for the portion that qualifies as business use.
For example, assume you drive your vehicle 10,000 miles in 2018. If 2,500 of those miles were for personal use and 7,500 miles were for business use, your eligible mileage claim is 7,500:
7,500 miles X $0.545 = $4,087.50
In the example above, you can claim $4,087.50 as a mileage deduction on your taxes.
If you use the standard mileage deduction, you cannot claim most of your vehicle expenses as a tax deduction. Vehicle expenses are generally claimed under the actual expenses method (described below). However, you can claim a few expenses as a deduction while using the standard mileage deduction:
- Parking fees and tolls associated with business travel
- Local and state personal property taxes associated with your vehicle
What is the Actual Expenses Deduction?
The actual expenses deduction is an alternative to the standard mileage rate deduction. The actual expenses method allows you to deduct vehicle-related costs if at least some of your driving is for business purposes.
You cannot use the actual expenses method if you use the standard mileage rate. The two methods are alternatives to each other.
What Expenses Can You Deduct?
The IRS lists a number of standard vehicle expenses that you can claim as a tax deduction:
- Lease payments
- Registration Fees
- License fees
- Garage rent
- Parking Fees
- Damages not covered by insurance payments
- Theft not covered by insurance payments
If you drive your vehicle for both personal use and business use, you must split your actual expenses between personal and business use. Divide your business miles driven by the total miles driven in the year, and you will calculate the percentage driven for business use.
Using the example from above, if you drive 7,500 miles for business purposes and 10,000 total miles in 2018, 75% of your actual expenses are tax deductible:
7,500 business miles driven / 10,000 total miles driven = .75
Accordingly, if your actual expenses for 2018 are $3,000, your actual expenses deduction is $2,250:
$3,000 X .75 = $2,250
If your vehicle is provided by the company, you can count any expenses that are not reimbursed by the company towards your deduction amount.
What Expenses CANNOT be Deducted?
In addition to the common vehicle expenses the IRS counts towards your tax deduction, it names some expenses that you cannot deduct.
Interest on vehicle loans is generally not deductible if you own your car personally. There are some exceptions to this rule if you are self-employed. Check out the IRS’ Deducting Business Expenses if you are self-employed.
Additionally, you cannot deduct fines you incur while driving for business (e.g. speeding tickets).
The IRS requires you to provide proof of your mileage claims and actual expenses. The IRS calls proof “substantiation”.
Substantiation varies depending on whether you choose the standard mileage deduction or actual expenses deduction.
Record Keeping – Standard Mileage
You need to keep a mileage log to substantiate your mileage deduction. A mileage log tracks mileage driven for business purposes. For each business drive, your log should track date, destination, distance (shown by an odometer reading at the beginning and end of the drive), business purpose, and the vehicle being driven. Download an example of a mileage log here.
Manually tracking mileage is tedious and prone to error. The IRS requires a written record to substantiate mileage; and fortunately, a computer-generated record satisfies this requirement.
Record Keeping – Actual Expenses
To substantiate actual expenses associated with the vehicle you drive for business use, your written record will look different than a mileage log. Instead, your written record will include documentary evidence of the actual expenses.
Documentary evidence includes receipts, work orders, and other written records that that prove the validity of expense. Sufficient documentary evidence includes certain elements for each expense:
- Expense amount
- Expense date
- Place of service/purchase
- Essential character of the expense (e.g. oil change, tire rotation, lease payment, etc.)
The IRS requires you to keep written records substantiating your deductions for business travel “as long as they may be needed for the administration of any provision of the Internal Revenue Code.”
What does this vague requirement mean? In most cases, if you keep your written records for three years after the applicable income tax return filing date, you will meet the IRS’ retention requirement.
There are some rarer circumstances when you need to keep your records longer. If you want to read through the detailed record keeping rules, review IRS Pub. 583, Starting a Business and Keeping Records.
Other Impacts on Vehicle Deductions
Your company may offer reimbursement for business use of your vehicle. Mileage and vehicle expense reimbursement reduce your eligible deduction claims.
Companies are not required to reimburse you for your business mileage or actual vehicle expenses. However, many businesses offer reimbursement as an added employment benefit.
Your deduction is reduced by the reimbursement amount. Using the standard mileage deduction example above, assume your company offers a reimbursement program of 35 cents per mile.
The standard mileage deduction, using 54.5 cents per mile, is $4,087.50. But, under your company’s 35 cents per mile policy, you are reimbursed $2,625:
7,500 miles X $0.35 = $2,625
To determine your mileage deduction, subtract your reimbursement from the standard mileage deduction total:
$4,087.50 – $2,625 = $1,462.50
Mileage reimbursements are attractive policies for employees who travel for business. But, be aware that reimbursement policies affect the mileage deduction and actual expense deduction.
Deduction Method Selection
Under IRS rules, you need to elect the standard mileage rate deduction method in the first year your vehicle is used for business purposes in order to take advantage of the mileage deduction.
If you wish to change to the actual expenses method later, you can do so at any time. However, once you change to actual expenses, you cannot revert back to the standard mileage rate.
If you lease a vehicle and want to use the standard mileage rate deduction, you must use the standard mileage rate for the entire lease period.
If you have driven your car (whether leased or owned) for business use for more than a year, your only tax deduction option is the actual expenses method.
Which Method Should You Choose?
If you haven’t been driving your car for business purposes, or you are considering a new vehicle purchase or lease for business use, you should forecast your anticipated mileage and expenses for the coming year.
By estimating mileage and expenses, you can calculate your tax deductions under both methods. The method that delivers the largest tax deduction may be the best choice for your purposes.
However, if your expenses and travel schedule are too difficult to estimate, you may want to elect the standard mileage deduction for the first year. You can always switch to actual expenses later, but not vice versa.
If you drive your vehicle for business purposes, track and record your mileage, business trips, and vehicle expenses. Come tax time, your bank account will thank you.