Tax Deductions for Business Vehicles

Whether your business owns or leases its vehicles, the Internal Revenue Service allows you to deduct the associated expenses from your business income. Any deduction helps to decrease your taxable income and annual tax liability. The business owner can choose from various options and methods of vehicle deduction, which allows him to determine its most effective use.

Business Expenses

Any expense you deem necessary to operate your business is an allowable tax deduction. As long as the expense is ordinary in your industry and reasonable, the Internal Revenue Service will allow it. This includes vehicle expenses if you need the vehicle to run your organization. Whether you use a vehicle to haul product to a customer or to run to the local supply store, a business needs a vehicle to complete these tasks.

Allowable Expenses

Allowable expenses for operation of a vehicle for business include all the associated costs of owning a vehicle. Fuel, oil, insurance, repairs, maintenance, depreciation, and loan interest are all permissible tax deductions. A tax write-off can also include lease payments if you lease rather than own the vehicle.

Personal Vehicle

If you use your personal vehicle for business, the expenses associated with the business use can be deductible from business income. You must keep accurate written mileage records to prove business use from personal use and to determine the expenses that will be deductible for the business.

Employees can also use their vehicles for business and receive reimbursement from the business or deduct these expenses from their own income on their personal tax return.

If the business uses a reimbursement plan that is accountable, the business will pay the employee for these expenses and will not include these additional funds as wages on their year-end wage statement Form W-2. This type of plan requires that the employee provide receipts or some other proof of their expenses to the employer. The business is then able to deduct these expenses from company income and the employee will not use this deduction on her personal tax return.

When a business is not using a plan that is accountable or the employee is paying for these expenses himself, the employee can deduct them on his personal return. A non-accountable plan will have the business deducting the expense, paying the employee, and adding this amount as wages to her Form W-2. The expenses would then be deductible on the personal return of the employee.

Determining Allowable Expenses

There are two methods used to determine total costs for the write-off. These include the standard mileage and the actual cost method. The standard mileage method uses a rate that is determined each year by the Internal Revenue Service and is subject to change. You simply multiply business miles by this rate to give the taxpayer a deductible cost.

For the actual cost method, total all associated costs (as noted above) of vehicle operation and determine an allocation for business use. For the employee and business owner, keep mileage records to prove the personal and business use of the vehicle. Total business miles divided by total miles driven will give you a percent of business use. Multiply this percentage by the total costs to determine the deduction to claim.

Tax Reporting

Vehicle expenses are reportable on the tax form of the business or the personal tax return of the employee. The employee will deduct these expenses by itemizing on Schedule A of form 1040 and the business will deduct them on their appropriate tax return. For the sole-proprietor, this would be form 1040 Schedule C, and for the partnership, expenses are reportable on form 1065. If the business made an election to file taxes as an S-Corp the business would use form 1120s to report their expenses.

References

• Topic 510 - Business Use of Car
• Topic 514 - Employee Business Expenses

Resources

• Internal Revenue Service