How to Deduct Auto Expenses

Many taxpayers have a hard time when it comes to taking auto deductions on their tax return. The rules can be confusing and knowing what documents to have for tax time can be difficult. This short guide can help you understand how the expenses are calculated.

There are two ways to calculate your auto expenses. There is the standard mileage rate and there is actual vehicle expenses.

Standard Mileage Rate

This is the simplest way to get a mileage deduction on your tax return. You get a 70 cent deduction for every business mile driven. This is best taken when you have an older vehicle as there is less to depreciate. If you have a C-Corp, S-Corp, Non-Profit, Partnership with an accountable plan you can be reimbursed by the business entity using the standard mileage rate. (if you are a client it is best to still give us the expenses for the vehicle so we can make a comparison.)

Actual Vehicle Expenses

This can be difficult to calculate, here is how it works. When you do actual expenses for your vehicle the IRS wants all expenses for the vehicle both personal and business. For example if you bought gas to visit family or if you bought gas to go on a business trip the IRS still wants to know what you spent on gas visiting your family, because of the way they calculate the auto deduction. For example lets say you drove 3,000 miles for business and 2,000 miles personal for 5,000 total miles. Your total auto expenses (both business and personal as one number) were $10,000 (your software may ask you to categorize these expenses before totaling). Typically you would stop here and enter these numbers into your tax return software and then the software will give you a number that you are not sure how it calculated it.

Here is the calculation:

3000 business miles/5000 total miles = 0.6 (60% business)

$10,000 total expenses X 0.6 = $6000 deduction.

As you can see the IRS needs the total miles driven, business miles driven, and all expenses to calculate the deduction. There are rules too on depreciation, book with us if you would like to learn more. Also if you have a business entity other than a sole proprietorship it would be best if you set up a meeting with us so we can go over if your business should own the car or if you should, optimizing your deductions for your entity type, making sure you are compliant as well and if you should lease, finance or outright buy a vehicle.

Please call us at 805-391-7555 or email at support@foryoutax.com