If a taxpayer uses a vehicle for both business and personal use, the expenses attributable to the business purpose may be deductible. Before any deduction can be taken, the taxpayer must be able to substantiate their business use by adequate records or sufficient corroborating evidence. Once the business miles are substantiated, the vehicle’s operating expenses allocable to the business use are deductible.
The following methods are available to compute deductible vehicle expenses:
- Standard mileage rate method; and
- Actual cost method.
The standard mileage rate method can be used by either self-employed individuals or employees for both owned and leased autos. If the taxpayer owns the vehicle, the standard mileage rate cannot be used unless it is used in the first year the vehicle is available for business use (Note: in later years, the taxpayer can then use either the standard mileage rate or the actual cost method). If the taxpayer leases the vehicle, the standard mileage rate must be used for the entire lease term (including renewals) if selected to be used in the first year. The standard mileage rate is not available for:
- Vehicles previously depreciated using a method other than straight-line (e.g., MACRS) or for which Section 179 deduction or a special depreciation allowance was claimed;
- Five or more autos used simultaneously in a taxpayer’s business; or
- U.S. postal service rural route employees who receive qualified reimbursements.
The standard mileage rate includes both operating and fixed costs associated with a vehicle including depreciation (or lease payments), repairs & maintenance, tires, fuel, oil, insurance and registration fees. Parking fees, tolls, and the business use portion of interest and personal property taxes can be deducted in addition to the standard mileage amount.
Using the standard mileage rate method simplifies recordkeeping; however, self-employed taxpayers may find it more beneficial to track actual costs and use the actual cost method, particularly for expensive vehicles, vehicles requiring significant repairs, or any vehicle during periods of rapidly rising fuel prices.
Commuting expenses are generally nondeductible personal expenses, regardless of distance; however, taxpayers whose residences qualify as their principal place of business under the home office rules can deduct daily transportation going to work locations. Sole proprietors whose residences don’t qualify as their principal place of business under the home office rules can still deduct the cost of transportation going to work locations from their residences if either of the following circumstances applies:
- A taxpayer who has no fixed place of business can deduct the cost of transportation to a temporary work site outside of the metro area where they live and work; or
- A taxpayer who has one or more regular work locations away from home can deduct the cost of transportation from the home to the temporary work site regardless of the distance or whether the site is within their metro area.
Business use of autos can become a significant deduction. Contact Flexible Accounting Services of the Triangle today and let us assist you in determining the best method for your circumstances.