Driving a Vehicle for Business - What is deductible?

You somehow convince your wife to finally give in, and you pull the trigger on leasing a brand new sports car. “Don’t worry,” you tell her, “I’ll get a tax break for driving this to and from work.” She eyes you suspiciously, but you drive off into the sunset.

Is this true? Can you really get some tax relief for driving to work?

Not so fast, speedster! Let's take a look at how you can deduct vehicle costs on your tax return. 

Business Use of Vehicles

If you own a business and use a car ONLY for business purposes, associated costs are fully deductible against your business income. This includes costs of owning and operating the car for business purposes. If the car is used for personal reasons as well, only the business portion of expenses are deductible. 

There are 2 options for deducting car expenses for business: 1) the standard mileage rate and 2) the actual expense method. You are free to choose whichever option benefits you the most on your tax return.

Standard Mileage Rate

Using the standard mileage rate, the taxpayer takes the amount of business miles driven in a given tax year and multiplies it by a standard rate. The IRS issues a rate (cents per mile) for every tax year.

Your deduction = business miles driven x the IRS standard mileage rate. 

For example, if you are calculating your 2023 business vehicle expense deduction, and you drove 10,000 business miles, your calculation is as follows:

Your deduction = 10,000 x $0.655 = $6,550.

Source: IRS Standard Mileage Rates

Actual Expense Method

This method uses the actual total costs of the vehicle during the tax year for business use. This may include: 

• Gas

• Maintenance, like oil changes

• Car insurance

• Fees and licenses

• Lease payments or depreciation

If you have to pay any tolls or fees to park, these are deductible no matter which method you choose. 

Depreciation

Depreciation is a complex topic in tax preparation. In addition to day-to-day car expenses, you also can "recover" the purchase price of your car through depreciation deductions. Each year, a portion of the purchase cost is deducted as a depreciation expense, until the car is fully depreciated. There are many laws, limitations, and calculations for depreciation.

Are there any commute costs that I can deduct on my tax return?

You are in luck! There are a few situations that warrant deducting commuting costs on your tax return, using either of the above methods. However, in order for your commute to be considered business and not personal, you must be commuting from your primary business location to another business location. See below for examples:

Remote work

Are you self-employed? Do you work from home? If you answered "yes" to both questions, you can deduct costs of traveling to meet clients in a separate location.

Traveling between business sites

Does your work include several business locations/offices? Do you travel between them? If so, you can deduct costs of this travel between the two business sites.

Temporary off-site work

Does your work sometimes require you to work very far from your usual business location? Is it easier to stay at a hotel near this site instead of driving to and from home everyday? If so, you can deduct the costs of your travel to the site, your hotel stay, and a portion of your meal expenses.

Stopping to see clients

Do you sometimes stop on the way to or from work to see a client? This small trip can be deductible to you, as long as it only encompasses the trip between work and the client. 

The Main Takeaway

In summary, the Internal Revenue Service (IRS) allows you to deduct vehicle expenses on your tax return, but only for business use of the vehicle. You can use either the standard mileage rate or actual expense method. Meticulous record-keeping of both business miles and expenses is a must in order to back up your calculations.

At Puddletown CPA LLP we can help not only keep track of your vehicle expenses, but also calculate your deductions (especially the complex topic of depreciation) for you. Contact us for a consultation.