There’s a lot to keep track of when you’re starting your small business. Sometimes half the battle is keeping track of your expenses so that you can write off business costs on your taxes. But have you ever considered that every mile you put on your car driving to and from client lunches, purchasing supplies, and dropping off packages at the post office could be tracked so you can deduct it?
One of the most convenient annual tax deductions for small businesses is the vehicle deduction. But, due to a lack of knowledge, many owners either don’t take complete advantage of this write-off, or do it incorrectly. There are a lot of considerations that need to be explored in order to get the most out of this business expense.
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 take into consideration: 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. In 2019, the IRS issued the standard mileage rate at 58 cents per mile. This is an increase from 54.5 cents per mile last year. If you drove 15,000 business miles for the year, then you’ll be able to deduct $8,700. When taking the mileage deduction, you can also expense the interest on the auto loan, registrations fees, parking and tolls.
The alternative to the mileage deduction is taking actual vehicle expenses. These include gas, oil changes, maintenance, repairs, licenses, insurance, parking garage. Just as is the case with the mileage deduction, you can take 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 have 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 2018, vehicles that were used 100% of the time for business were allowed to depreciate $10,000 plus $8,000 in bonus depreciation. If you’re driving the vehicle for personal use, this depreciation can still be taken! However, it will be given at the rate in which you used the car for business. For example, if you drive 7500 business miles and 2500 personal miles, then you would take 75% or $13500 of the depreciation. Sport utility vehicles weighing between 6,000 and 14,000 pounds can be fully expensed. That means if you purchased a jeep for $50,000, you can write that entire price off the first year.
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 mileage deduction.
Choosing how to expense your travel as a small business owner is a complex thing. Following the above steps, starting with what kind of vehicle you want, and or can afford, and then deciding how best to maximize your return can yield a promising return on your taxes, when filed correctly.