Vehicle Tax Deductions: Everything You Need To Know

There’s a lot to keep track of when you’re starting your small business. One of the most important is tracking your expenses so that you can write off business tax deductions when it's time to file. Did you know that each mile you drive for business purposes can be deducted? You can claim deductions for a wide range of vehicle uses, from driving to client meetings and buying supplies to delivering packages to the post office.

The vehicle tax deduction is one of the most beneficial annual tax deductions available to small businesses. However, due to a lack of understanding, many business owners do not take full advantage of this benefit or make mistakes when claiming it. To maximize the advantages of the vehicle business expense, it's important that you thoroughly understand and consider all the aspects involved. Continue reading as we discuss everything you need to know about the vehicle tax deduction to maximize your savings.

Lease or Own?

The first decision an owner has to make is whether to lease or own a vehicle. This can be dependent on a lot of things: your credit score and/or cash flow, where you operate your business, and how often you travel for work. Leasing may cost you less per month, but there are restrictions on the miles you can use.

Once you obtain the vehicle, there are a few things to consider: if you use the standard mileage rate (we’ll get to that later), the lease payment is not deductible. If you use the actual expenses, you cannot depreciate the vehicle (hold on, we’ll talk about that in a bit.)

Standard Mileage or Actual Expense?

Now that you have your vehicle, the next decision a small business owner has to make is whether to take the standard mileage rate or the actual expenses incurred during the year.

Standard Mileage

Per the IRS, in 2023, the standard mileage deduction rate has increased to 65.5 cents per mile driven for business use. When taking the mileage deduction, you can also expense the interest on the auto loan, registration fees, parking, and tolls.

Actual Expense

The alternative to the mileage deduction is taking actual vehicle expenses. These include gas, oil changes, maintenance, repairs, licenses, insurance, and parking garages. Similar to the mileage deduction, you can deduct the auto loan interest, registration fees, parking, and tolls when choosing the actual expense.  Dependent on whether you have leased or purchased the vehicle, you can deduct the lease payments or take depreciation.

Taking the actual expenses has been very popular due to the included depreciation expense. Some business owners decide to purchase luxury vehicles so that the depreciation is a higher number.

In 2023, vehicles used entirely for business purposes can depreciate up to $28,900 and an additional 80% bonus depreciation, if they qualify for the special depreciation allowance​. If the vehicle is also used for personal purposes, you can still claim this depreciation, but it will be proportionate to the business use of the car.

Varying Mileage and Actual Expense

A very important point - you can switch from the mileage deduction to the actual expense. However, the basis of your vehicle will be reduced by a portion of the standard mileage rate that was deducted. This means a small- to no-depreciation expense going forward. You are not allowed to make the switch back, from the actual expense to the mileage deduction.

Work With Business Tax Experts To Maximize Your Savings

Choosing how to expense your travel as a small business owner is a complex task. Following the above steps, starting with what kind of vehicle you want and or can afford, and then deciding how best to maximize your savings can yield a promising return on your taxes when filed correctly. If you're having difficulties optimizing your deductions, don't hesitate to reach out to 1-800Accountant's business tax experts by scheduling a free call to see how we can help.