Are you self-employed and travel by car regularly for your business? Have you ever wondered whether it would be more beneficial for you to take a deduction on your tax return for the miles you travel compared to the miscellaneous expenses you pay for your vehicle throughout the year? It is important to understand your options for the two deduction methods- actual auto expense method or optional mileage rate method. The method choice that you make in the initial year that you place the care in service for business purposes can have a lasting impact and affect future deductions in subsequent years.
If in the first year of business use of the vehicle you choose to use the actual auto expense method, you are required to use this same method in all subsequent years. This method does allow you to use Modified Accelerated Cost Recovery System (MACRS) depreciation, which increases the depreciation in earlier years and lowers it in later years. If, on the other hand, you choose to use the optional mileage method, you can switch back and forth between the two methods in subsequent years depending on which method would give you the greater tax deduction. The only slight change with using the actual expense method in those subsequent years after initially choosing the optional mileage rate method, is the method of depreciation. Instead of being able to use MACRS depreciation, Straight Line (SL) depreciation must be used.
Actual Auto Expense Method
Beginning with the actual auto expense method may be beneficial when your vehicle is used for mostly business purposes rather than personal and incurs many repair or maintenance expenses during the year. Below you can find a listing of many expenses that can be deductible when using the actual auto expense method.
- Maintenance & Repairs
- Vehicle Registration Fees
- Depreciation (MACRS)
- Rental or Lease Payments
- Garage Rent
- Tolls & Parking Fees
Optional Mileage Rate Method
The current mileage rate used for the deduction calculation is 54.5 cents per mile. Beginning with this method can be useful if you are using a brand-new vehicle or if you use your vehicle for personal reasons in combination with business. This method has less paperwork involved and all you would need to keep track of are total miles for the year and business miles for the year. There would be no need to track down receipts for repairs or other miscellaneous car expenses because they are already included in the above-mentioned rate.
A few examples of travel mileage that should be kept track of:
- Meeting with a client
- Meeting with a professional service provider on business matters
- Buying office supplies or depositing money in the bank for your business
Keeping Detailed Records
Keeping organized, detailed and legible records of mileage and/or actual expenses for your business use vehicle is imperative. Being able to calculate the best deduction possible relies heavily on the records that are kept. We recommend keeping a notebook in the vehicle to write down when a vehicle expense incurred as well as to track the business purpose’s mileage. It would be helpful to record the date, the miles traveled, destination and any notes about the trip’s purpose. Alternatively, there are also phone apps available that are great for tracking business mileage and expenses.
If you would like to speak with a tax professional in more detail regarding your vehicle expense deduction options, please contact SC&H Financial Advisors.
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