If you ever use your personal vehicle for work reasons, you’ve probably noticed your car expenses climbing as a result. Business owners will inevitably use their own personal assets for work reasons, which can make the process of separating “business expenses” from “personal expenses” much easier said than done. In this guide we’ll go over the two methods that you can use to deduct your car expenses, how to keep your records clean, and how to maximize your deduction so you pay less in taxes.
There are two different methods for deducting your vehicle expenses: the “actual expense method,” and the “standard mileage method.”
The actual expense method involves tallying up all of your car expenses for a given tax year, and deducting the percentage of those expenses that can be attributed to your business.
The eligible car expenses that you can deduct include:
Maintenance expenses like oil changes or new tires
License and registration fees
You can calculate the amount of your deduction by tallying up how much you’ve spent on the above expenses, and multiplying that total by the business use percentage of your car. “Business use percentage” refers to the percentage of time that your car is used for work, rather than for personal expenses.
For example, let’s say you put 20,000 miles on your car in 2021, and 5,000 of those miles were from work trips. Your car’s business use percentage would be 25% (5,000 business miles divided by 20,000 total miles).
To find the amount of your deduction, you’d multiply your total vehicle expenses by this business use percentage. If you spend $9,000 on car expenses in 2021, your deduction would be $2,250 (25% x $9,000).
As you can probably imagine, the actual expense method requires a lot of bookkeeping; you’d need to keep track of all of your car expenses throughout the entire tax year, which can mean keeping track of hundreds of receipts for all of your gas, car payment, car insurance, and other car expenses.
That’s why the IRS offers a simplified way of deducting your car expenses; the standard mileage method involves deducting a flat amount for every mile that you drove for work in a given year. The 2021 standard mileage rate for business-related miles is 57.5 cents, meaning driving 100 miles for your business will get you a deduction of $57.50.
If we use the same example as above and assume you drive 5,000 miles for work in 2021, your deduction would be $2,875 (5,000 x 57.5 cents). In this case, deducting your mileage would get you a higher deduction than the actual expense method.
Deducting your mileage can save you a ton of time when it comes to bookkeeping; since you’re only tracking the number of miles that you drive for work, and not tracking every car-related purchase that you make, there’s less information and receipts to keep track of throughout the year.
Note: There are a few eligibility requirements that you need to meet if you want to deduct your mileage, the most important being:
You own or lease your car. If you rent your car, you’ll need to use the actual expense method.
You haven’t used the actual expense method in past years for the same car. You can switch from using the mileage method to the actual expense method, but not the other way around. The IRS prevents you from doing this because depreciation deductions can be very high in the first 1-2 years of owning a car and then taper off in subsequent years, whereas the standard mileage rate assumes a flat depreciation amount.
Similar to your other business expenses, you should keep a log of any vehicle-related deduction that you take. If you choose to use the standard mileage method, then you should keep a log of your mileage throughout the year that includes the date of the trip, the number of miles driven, the starting and ending locations of your trip, and the purpose of the trip. You won’t need to submit your mileage log along with your tax return, but you’ll want to have these records available if you’re ever audited.
If you’re deducting your actual car expenses, then you should track 1) the amount, merchant, date, and purpose of each of your car expenses, as well as 2) the number of miles that you drove for business vs. personal reasons, so you know the business use percentage of your car.
You’ll need to track your business-related mileage regardless of the deduction method that you choose. If the purpose of your trip is for work, you can consider those miles to be business-related. Miles driven while running work-related errands, meeting with clients, visiting work sites or properties, driving for rideshare or delivery apps, and other similar trips would all count as work-related trips.
Just be sure not to deduct any miles from personal trips; for example, if you run a personal errand in between work errands, you shouldn’t deduct the miles that you drove on the way to conduct the personal errand.
You should also avoid deducting the miles from trips that could be categorized as “commuting.” If you drive to the same place for work every day—like an office or a coworking space—then your trip counts as a “commute.”
The IRS will still allow you to deduct your car expenses if you can reasonably prove the number of miles that you drove (or the amount that you spent on your car) in a given period. For example, if you have a solid mileage log for July through December of a given year that shows you were driving a consistent 100 miles for work per month, and you can prove that you were conducting roughly the same amount of business trips for January through June of the same year, then you can still deduct the same 100 miles per month.
You can also tally up your mileage using records besides a mileage log. For example, if you drive for a rideshare or delivery app, your account will show a history of your past trips, which will include enough detail to calculate how many miles you were driving. Appointment books and calendars are also great places to check if you need to retroactively calculate how many miles you drove for work in a given day or week.
The same rule applies with your actual car expenses. If you weren’t tracking your actual car expenses from February to April, but you know that you typically spend $600 per month on gas, car insurance, maintenance, car payments, and other actual car expenses, you could still deduct that same $600 per month as long as you can reasonably prove that you were driving for work
Not sure whether you should be using the actual expense method or the standard mileage method? There are a few ways to tell which method will work best for you.
The actual expense method may be best for you if:
You car has low gas mileage
You have higher-than-average maintenance expenses
You’re pretty good at keeping your receipts and expense information organized
You have a new car that would qualify for a high depreciation deduction
The standard mileage method may be best for you if:
Your car has great gas mileage
You plan to drive 10,000+ miles for work in a given year (the mileage deduction is pretty generous, so if you drive a lot for work, you may end up deducting more than you spent on your car)
You struggle to keep your receipts and records organized
Or, if you don’t mind doing a little extra bookkeeping, you also have the option of tracking both methods for a while (or for the entire year) to see which one gets you the higher deduction. You can choose your deduction method once you file your taxes the following year.
Remember—the best way to track your expenses is at the time that they’re incurred. Tracking your expenses as you go will prevent you from missing out on any deductions. If you use Found for your business bank account, you can track your vehicle expenses directly in your Found app. Not using Found yet? You can get started for free by downloading the Found app here.
Have questions about deducting vehicle expenses, or tracking your mileage with the Found app? Contact us at firstname.lastname@example.org!