Updated for Tax Year 2014
If you use vehicles in your small business, how and when you deduct for the business use of those vehicles can have significant tax implications. It pays to learn the nuances of mileage deductions, buying versus leasing and depreciation of vehicles. Special rules for business vehicles put in use in 2014 can deliver healthy tax savings.
Some important questions
The deduction for using vehicles in your business can sometimes be significant, so it's important to make the following decisions:
- Is it better to use the standard mileage rate as your deduction or the actual expenses incurred for a vehicle used for this business?
- Who should own the vehicle? The business, the business owner or the employee?
- Should the business lease or buy the vehicle?
Here's a general overview
Business vehicles are cars, SUVs and pickup trucks that are used for business activities.
What does not qualify:
- Vehicles used as equipment, such as dump trucks
- Vehicles used for hire, such as taxi cabs or airport transport vans
Congress decided years ago that the taxpayers should not subsidize extravagant vehicles used by business. To prevent that, the law squeezes otherwise allowable depreciation deductions for “luxury cars.” But don’t think Rolls Royce or Ferrari. Congress has a much less extravagant view of luxury. For 2014, the maximum first-year depreciation write-off for a new (not used car) that costs over $15,300 is $3,160. For a used car, the maximum first-year write-off for 2014 is a much lower $3,160. (These figures assume 100% business use.)
The limit is higher for SUVs with loaded vehicle weights over 6,000 pounds. For such vehicles put into use in 2014, 50% of the cost can expensed using Section-179 expensing, plus another 50% of the cost that wasn't expenses under section-179 for bonus depreciation, plus another 20% of the cost leftover for regular first-year depreciation. So for a new $50,000 heavy SUV put to use in 2014 and used 100% for business, $40,000 can usually be written off in 2014.
Keep good records
The IRS is very fussy about writing off the cost of vehicles, so if you plan to take a vehicle deduction it's essential to keep a detailed log of your business miles and other expenses if you want to write them off, too. We suggest that you pick up a vehicle expense log at an office supply or stationary store and keep it in your car.
Standard mileage rate versus actual expenses
Whether to use the standard mileage rate or actual costs is a numbers game. Generally, the more economical the vehicle is to operate, the more likely it is that the standard mileage rate will give you the bigger deduction. Conversely, the higher the operating costs, e.g. gas, repairs, tires, etc. the more beneficial the actual cost method is likely to be.
Standard mileage rate
The IRS allows employees and self-employed individuals to use a standard mileage rate, which for 2014
business driving is 56 cents per mile.
To determine the number of miles driven for business you need two numbers for each business vehicle:
- The total number of miles driven during the year
- The total number of miles driven just for business
Tracking your total mileage for the year is easy. Write down the odometer reading on the day that you start using a vehicle for business and on the day the year ends. Business miles are the number of miles actually driven for business, for example, to visit a customer or meet a client.
Remember that any miles driven to the bank, office supply store, computer store, to meet with your accountant or to meet with your lawyer on business matters also count as part of your mileage deduction.
Some travel is not considered business-related:
- Driving from your home to your workplace and back is commuting. It's not deductible on either your business or your individual return.
- If you stop at the store on the way home from a business trip, the remaining miles from the store to home are considered personal mileage, so you can't include them.
Actual vehicle expenses
You can deduct interest on an auto loan, registration and property tax fees, and parking and tolls in addition to the standard mileage rate deduction, as long as you can prove that they are business expenses. Here’s a list of auto-related expenses you might incur.
- Gas and oil
- Maintenance and repairs
- Registration fees and taxes*
- Vehicle loan interest*
- Rental or lease payments
- Garage rent
- Tolls and parking fees*
*Also deductible if you choose the standard mileage method.
The percentage of time (based on miles) that the vehicle is used for business determines the deductible portion of these expenses.
Here's how the math works:
Let's say your gas, oil and repairs came to $3,000 for the year. Fees and taxes were $500. Loan interest and insurance were $1,500. If it's an old car, the is no depreciation write-off. Your total "actual" expenses were $5,000.
Your total mileage was 18,000 and documented business miles were 16,202. The business-use percentage is 90% (16,202 divided by 18,000).
If you use the actual expenses method, you could deduct $4500 (90% of $5,000).
If you use the standard mileage rate, your 2014 deduction would be $9,073 (16,202 x 56). In this case, the standard mileage method gives you the bigger tax benefit.
The business-use percentage usually varies from year to year. Operating expenses are annual expenses and do not affect subsequent years.
This is the amount you can deduct over time for general wear and tear of the vehicle. The standard mileage rate includes an amount for depreciation and reduces the adjusted basis of the vehicle when you decide to sell or otherwise dispose of it. In the example above, it works out this way: