Calculating Vehicle Deductions for Self-Employed and Small Business Owners

For self-employed individuals and small business owners, a vehicle is often a vital tool for conducting business. Whether you’re visiting clients, delivering goods, or traveling between work sites, understanding how to deduct vehicle expenses can lead to significant tax savings. Properly tracking and calculating these deductions is crucial to avoid costly mistakes while maximizing your benefits.

Understand the Two Methods for Calculating Deductions

The IRS allows you to choose between the Standard Mileage Rate or the Actual Expense Method for deducting vehicle-related costs. Each has its benefits, and the right choice depends on your specific situation.

Standard Mileage Rate: This method uses a fixed rate per mile driven for business purposes. For 2024, the IRS standard mileage rate is 67 cents per mile. This is ideal for vehicles with lower operating costs or for those who drive many business miles. You'll need to leep a detailed log of your business miles, including the date, purpose, and destination of each trip.

Actual Expense Method: This method calculates deductions based on the actual costs of owning and operating the vehicle, including: Gas, repairs and maintenance, insurance. depreciation, and registration fees. If you use your vehicle for both personal and business purposes, you’ll need to calculate the percentage of business use by dividing business miles by total miles driven. This method is better for vehicles with higher operating costs or limited business mileage.

Pro Tip: You can switch methods in different tax years as long as you use the standard mileage rate in the first year the vehicle is placed in service.

Keep Accurate Records

No matter which method you choose, maintaining detailed records is critical. Poor documentation can lead to missed deductions or issues during an audit. The various ways of keeping records include:

Mileage Logs: Record the date, purpose, and mileage for every business-related trip. Use apps or spreadsheets for convenience.

Receipts: Save receipts for gas, repairs, insurance, and other expenses if using the actual expense method.

Vehicle Records: Keep documents showing the vehicle’s purchase price, financing details, and the date placed in service for business use.

Beware of Common Mistakes

While vehicle deductions offer substantial tax savings, there are pitfalls to watch out for:

Mixing Business and Personal Use: Only the business-use percentage of expenses is deductible. Avoid deducting personal mileage to prevent issues with the IRS.

Inadequate Documentation: Failing to maintain logs and receipts can disqualify deductions during an audit.

Claiming Both Methods: You cannot use both the standard mileage rate and the actual expense method for the same vehicle in the same year.

Deducting vehicle expenses is a valuable tax-saving opportunity for self-employed individuals and small business owners. By understanding the rules, keeping meticulous records, and selecting the method that suits your situation, you can make the most of these deductions. For personalized assistance with your vehicle deductions and other tax needs, contact info@mkhstaxgroup.com today.