Your Guide to Deducting a Vehicle for Your Business Tax Deductions

As a business owner, it’s important to utilize all available business tax deductions to lower your overall tax liability. One deduction that some business owners fail to take advantage of is the vehicle tax deduction.

Some forgo the deduction because they worry it will trigger an audit, or they may not know if they’re eligible to take it. Here’s what you need to know about including vehicle expenses as part of your business tax deductions. 

Criteria for Deducting Vehicle Expenses

The rules for deducting vehicle expenses are actually fairly simple: if you use your vehicle in the course of your business, you’re eligible for the deduction.

However, unless the vehicle is only used for business purposes, you can’t deduct all of the expenses associated with running and maintaining it. Instead, you’ll adjust the expenses depending on how frequently you use the vehicle for business purposes. 

Options for Determining Your Vehicle Deduction 

There are two ways to calculate your business tax deductions for your vehicle.

The first option is the standard mileage method. This alternative permits you to deduct a specific amount per mile that you drive for business purposes. 

As of the 2021 tax year, the standard mileage rate is $.56 per mile. If you drive 6,000 miles for your business in 2021, your deduction with the standard mileage method is $3,360 ($.56 multiplied by 6,000).

Your second option for calculating business tax deductions for your vehicle is the actual expenses method. Using this method, you’ll keep track of the actual expenses associated with operating your vehicle and adjust them according to how much the vehicle is used for your business.

For example, assume that you spend $500 oil changes, $2,000 on gas, $600 on vehicle insurance, and $500 on additional vehicle repairs. Based on your mileage logs, you estimate that 40 percent of your vehicle’s use is for your business. 

Of your $3,600 in vehicle expenses, you can take 40 percent of them as a deduction. This yields a deduction of $1,440.

Choosing a Deduction Method

Both methods require you to keep track of your business travels. The actual expenses method also requires you to track your vehicle expenses. 

If you want to use the standard mileage method, you must use it the first year you use your vehicle for business. After the first year, you may switch to the actual expenses method or keep using the standard mileage method.

Should you use the actual expenses method the first year you have your vehicle in operation, you must use it the entire time you use your vehicle for business purposes. 

Run the numbers both ways to see which option maximizes your business tax deductions. 

Have more questions about deducting your vehicle expenses? Contact us today!