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ResourcesAccounting and Taxes

How to Write Off a Car For Business

Accounting and TaxesNovember 29, 2023

If you’re self-employed, there’s a good chance you use a car to conduct certain aspects of your business. Fortunately, whether you drive for work consistently or only occasionally, you should be able to deduct the associated expenses from your income.

However, the vehicle tax write-off is surprisingly complicated, and misunderstanding its rules can have long-lasting repercussions. Let’s explore how to write off a car for business so you can minimize your tax bill while avoiding costly mistakes.

What is the Vehicle Tax Write Off?

The vehicle tax write-off lets self-employed people deduct costs associated with the business use of cars they own or lease. “Business use” of a car generally refers to any trips directly related to and necessary for your operation, such as:

  • Completing rides while driving for Uber

  • Picking up raw materials for goods you sell on Etsy

  • Meeting a client at a house showing as a real estate agent

Any costs associated with the personal use of a car are typically not tax deductible. As a result, if you’re one of many independent contractors using one vehicle for business and personal activities, you can typically only write off a portion of your car expenses.

One counterintuitive point to note is that the cost of driving to your regular place of work is not deductible. For example, a hair stylist who rents space at a salon where they meet with all their clients can’t usually write off the cost of commuting to that location.

Fortunately, many businesses have plenty of other car expenses to write off. By claiming them on your Schedule C, you lower your net business earnings, indirectly reducing your income and self-employment taxes.

Unfortunately, employees can no longer take a tax deduction for their vehicle expenses. They used to be able to write off certain costs their employers didn’t reimburse them for, but the Tax Cut and Jobs Act eliminated that possibility for tax years after 2017.

What Vehicle Expenses Are Tax Deductible?

Most expenses associated with acquiring and maintaining your business vehicle are potentially tax deductible, assuming they’re ordinary and necessary. For example, that includes all of the following:

  • Fuel

  • Depreciation

  • Insurance premiums

  • Auto loan interest

  • Lease payments

  • Repairs and maintenance

  • Replacement tires

  • Garage rent

  • License and registration fees

When you claim these car expenses on your taxes, you generally combine them into a single category, “vehicle expenses.” Interestingly, however, parking fees and tolls associated with your business are separately deductible.

In other words, you can report those costs on a different line in your tax return. That matters because you can claim them regardless of which method you use to write off your other car expenses, which we’ll discuss in more detail in the next section.

As you can imagine, keeping track of all these costs can be challenging without effective bookkeeping systems. So, if you want to write off a car for business, consider signing up for Found, a platform with a built-in business bank account and mileage tracker.

Vehicle Tax Write-Off Methods

There are actually two ways to write off a car for business, each with its own pros and cons. Notably, the Internal Revenue Service (IRS) limits your ability to switch back and forth between them, so it’s essential you consider carefully before committing to one.

Here’s what you should know about how they work.

Actual Expense Method

The actual expense method of writing off a car involves claiming the business portion of your total qualified vehicle costs. It generally takes more work than the standard mileage method since it requires that you track:

  • All your various car expenses

  • Both your personal and business mileage

To calculate your deduction with this information, add your personal and business mileage together, then divide your business mileage by the sum. Next, multiply your total car expenses by the result.

For example, say you drive 5,000 business miles and 10,000 personal miles for a total of 15,000 total miles in 2023. You also have $6,000 in car expenses for the year.

5,000 business miles divided by 15,000 total miles equals 33%, and 33% of $6,000 equals $2,000. If you use the actual expense method, that would be your car tax deduction for the year.

Standard Mileage Method

The standard mileage method of writing off a car for business requires you to keep track of significantly fewer things than the actual expense method. In fact, you only need to keep a log of your business mileage.

To calculate your car tax deduction using this method, multiply your total business miles driven during the tax year by the appropriate rate published by the IRS. It gets updated regularly for inflation, so make sure you’re using the right one.

In one of the most significant tax changes for 2023, the standard mileage rate jumped to 65.5 cents per mile, up from 58.5 cents per mile at the start of 2022.

Let’s apply that rate to the example from the previous section, where you drove 5,000 business miles in 2023. With the standard mileage method, your car tax deduction for the year would be 5,000 miles multiplied by 65.5 cents, which equals $3,275.

Standard Mileage vs. Actual Expenses: Which Method to Choose?

Now that you understand how the two methods of writing off a car work, let’s discuss what else you need to know to choose between them.

Why Choose the Standard Mileage Method

The most obvious advantage of the standard mileage method is that it requires less bookkeeping. All you need to do is track your business miles and multiply them by the appropriate rate to calculate your deduction.

In addition, the more you drive for business, the more likely the standard mileage method is to generate a higher deduction than the actual expense method. As a result, it may be more lucrative for rideshare and delivery drivers.

Lastly, choosing the standard mileage method for a car you own in its first year of service gives you the flexibility to switch to the actual expense method later. However, using it for a car you lease locks you into the standard method for the life of the lease.

Why Choose the Actual Expense Method

The actual expense method requires that you keep track of all your car-related activities and expenses. That can be a lot of work if you don’t have a separate business bank account or an automated bookkeeping system.

However, keeping sufficient records is pretty manageable with the right tools in place, so that shouldn’t affect your decision too much. What’s more important is which saves you the most money in the long run.

The actual expense method is often more lucrative when you drive less frequently and pay more for other car expenses like maintenance. However, using it in the car’s first year stops you from using the standard method later, whether you lease or own it.

If you aren't sure which method makes the most sense for you, it’s always a good idea to consult a tax professional, such as a Certified Public Accountant (CPA). They’ll be able to help you determine the most suitable choice for your circumstances.

Vehicle Tax Write-Off Mistakes to Avoid

There are a lot of moving pieces involved in writing off a car, and it’s easy to make small mistakes that can have a significant impact on your taxes. Here are four of the most notable pitfalls to avoid:

  • Keeping insufficient records: Having bookkeeping systems in place at the start of the tax year is always critical for filing an accurate tax return, but especially if you want to take the car write-off. That’s because it’s often impossible to determine your business and personal miles retroactively without them.

  • Not claiming allowable costs: Just about every expense associated with the business use of your car is tax deductible. Make sure you keep track of all of them and claim everything you’re eligible to on your tax return. Don’t forget to include depreciation, which isn’t a cash expense.

  • Overstating business mileage: Be careful not to claim you’ve driven more for business than you actually did. For example, don’t accidentally include your regular commute to work in your mileage. That could trigger an IRS audit and expose you to penalties and interest.

  • Using the wrong deduction method: Not only can choosing the wrong vehicle tax write-off method cost you money in that tax year, but it can also prevent you from taking the one you want in subsequent years. Consider very carefully before you commit to a method after placing your vehicle into service.

Once again, it’s a good idea to consult with a CPA if you plan to start using a car for business activities. Fortunately, whatever you pay them is typically considered a tax-deductible expense.

Use Found to Track Your Car Expenses and Mileage

As we’ve established, having effective bookkeeping systems is essential if you want to write off a car. To even calculate your deduction under the actual expense method, you must track your car expenses and your personal and business mileage.

Fortunately, Found is the perfect tool for the job. It's a checking account designed to make bookkeeping and tax filing easier for the self-employed. Not only can it automatically track your income and expenses, but it also has a built-in mileage tracker.

If you're looking for an app to help streamline your recordkeeping for the vehicle tax write-off, sign up for Found today and try out all its powerful features for free!

FAQ

If I Bought a Car, Can I Claim It On My Taxes?

If you’re self-employed and bought a car, you can claim a deduction on your taxes equal to the portion of the cost associated with your business use of the vehicle. If you’re an employee, you can’t claim it on your taxes at all.

However, self-employed people generally can’t write off the entire cost in the year they buy it, even if they use the car exclusively for business. Instead, you typically must depreciate the vehicle over its useful life, which spans multiple tax years.

What Counts as Business Mileage?

If you’re self-employed, business mileage generally refers to any driving you complete for reasons directly related to and necessary for your trade or business. For example, that would include delivering groceries while driving for Instacart.

Can I Deduct Mileage to and From Work as an Independent Contractor?

Unfortunately, driving to and from your primary place of work isn’t tax deductible, even as an independent contractor. Your commute is considered a personal trip for the purposes of writing off your car.

However, you can include miles driven to other places of work. For example, a contractor can’t write off the commute to their office, but they could write off trips to a client’s home where they’re performing renovations.

Are Tolls Tax Deductible?

Tolls you incur while driving your car for business purposes are generally tax deductible. In fact, they’re deductible separately from other vehicle expenses, which means you can claim them whether you use the standard mileage or actual expense method to write off your car.

Are Car Payments Tax Deductible?

The business aspect of certain monthly car payments is tax deductible. However, the calculation differs depending on whether you’re paying for a lease or an auto loan.

If you lease your car, the entire monthly payment is potentially includable in your deductible vehicle expenses. However, if you’re paying off an auto loan, only the interest portion of your monthly payment is deductible.

Disclaimer: The information on this website is not intended to provide, and should not be relied on, for tax advice.

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