How to properly account for and deduct auto expenses
If you use your vehicle for business purposes, you are likely entitled to take a deduction for your business-related vehicle expenses.
Today, we will be discussing the two methods available to account for and deduct vehicle expenses as a self-employed entrepreneur.
Method #1: Actual expenses method
- Under this method, you are required to track all expenses you incur to operate your vehicle; this includes gas, repairs, registration fees, insurance, toll fees, parking expenses, tire replacements, garage fees, oil changes and other maintenance costs. You will also want to track the total miles you drive for business purposes and the total miles driven for personal use. At the end of the year, you’ll multiply the total amount spent on the expenses listed above and multiply it by the percentage of business-use miles driven throughout the year. This method requires a lot more documentation requirements, however, would allow for a more accurate deduction. Other common vehicle expenses that can NOT be included in the deduction include monthly payments on car loan and vehicle down payments.
Method #2: Standard mileage deduction
- In order to use the standard mileage deduction method, you must use this method in the first year that you place the vehicle in service. If you opt to use the actual expense method in the first year your business is placed in service for your business, then you cannot use the standard mileage deduction in the 2nd year.
- The standard mileage deduction allows you to deduct the mileage costs of traveling from your main place of business to your clients using the standard mileage rate set by the IRS.
- For January 1 – June 30, 2022, the standard mileage rate is 58.5 cents per mile. From July 1 – December 31, 2022, the standard mileage rate increases to 62.5 cents per mile
- It is important that you use either a spreadsheet or software to help you track your business trips and mileage. You will need to retain the following information for each trip:
o Date of trip
o Business purpose of the trip
o Starting and ending location
o Total miles traveled (round trip)
- Under this method, you can also deduct the costs for parking and toll fees incurred while traveling to the client. Just be sure to include the receipts with the trip details listed above.
Mileage expenses can add up fast! Make sure you’re keeping track so that you won’t miss out on this deduction!
