We all drive. Almost everyone who is self employed will have to use their car for business. How do you write off your car? Let’s take a look at what you can and cannot deduct when it comes to your vehicles.
When it comes to auto deductions for self employed taxpayers, I haven’t met one self-employed individual who doesn’t try to write off 100% of their vehicle expenses, even if they use the vehicle personally as well. This isn’t really their fault though. I’ve seen ads and heard people talk about how their CPA lets them write off everything. I had a client ask about writing off an Audi R8. He didn’t qualify but the fact that someone is asking about writing off a $200,000 supercar on their taxes (and thought he could) tells you how much bad information there is out there.
The reality is it’s pretty easy to figure out what you can deduct and what’s off limits. Let’s take a look and see what’s best for you.
I. What Do You Mean I Can’t Write Everything Off?:
To determine the portion of your auto deductions for self employed that can be deducted, it’s essential to calculate the business use percentage. This percentage represents the portion of time you use your vehicle for business purposes versus personal use.
The personal use of your vehicle IS NOT deductible.
If we’re talking about a work truck or van (like a contractor would use) that has storage boxes or shelve installed (in the case of a van), you are more than likely writing off everything. This will be an issue if you don’t have another vehicle to drive during off hours.
II. What’s Legit Deductible?:
If you’re self-employed, then you can write off most auto deductions associated with your vehicle, including:
- Depreciation
- Lease payments or loan interest
- Gas, oil and other fluids expenses
- Insurance premiums
- Repairs and maintenance costs
- Licensing and registration
- Tolls and parking fees
- Upgrades to the vehicle (like the example above). Sometimes theres a way to write off expenses that seemingly don’t belong. The next example shows one way.
I had a shifter cart business get into the manufacturing of body kits and other go-fast parts for the Nissan GTR series, and started selling them on his website. He actually bought a GTR to “test” the parts for these cars. The bHe offered everything for sale on his website and actually made a profit on sales of bodykits and suspension components).
He took the car to shows and became known for his GTR support. He got to write off a $120,000 car because he actually used it 100% for his business. This just shows you that a little creativity may be required to get the best legit deduction.
III. Huh? Why Do You Care If I Have A Home Office?:
Isn’t this an article about Auto Deductions for Self Employed taxpayers? Why does a home office matter? Part of your mileage deduction relates to your actual miles driven. The IRS wants you to break it out between business usage, personal usage and commuting miles driven. If you take a home office deduction, you shouldn’t have commuting mileage.
Commuting mileage is specifically excluded in the IRS code. Here’s how I explain this to my clients.
The first trip of the day to your first destination is a commute, regardless of you taking a home office deduction or not.
The last trip of the day driving home after your last destination is also a commute.
So the first AND last trip of the day will not be deductible. Sounds easy, right? Wrong.
I had a client who lived about 2 hours away from his biggest client. He made this trip 5 days a week, first thing in the morning. His old tax person wouldn’t let him write off the mileage driven (about 240 miles a day) since it was his first AND last trip of the day.
The workaround I came up with was so simple, I was shocked his old tax preparer missed it.
I had him establish appointments near his home first thing in the morning. That trip became his commute.
I had him set up appointments on his way home too. So now his commute home wasn’t 120 miles, but closer to 20. This alone saved him close to $2,500 in tax the first full year he implemented this, and it’s perfectly legal.
IV. Record-Keeping and Documentation:
Tracking your auto deductions as a self-employed individual can be divided into two sections.
Mileage
The starting point is to track the miles driven. The easiest way is via an app on your phone. I use MileIQ but there are many others available. QuickBooks online has one built into their package and another one I’ve heard good things about is Everlance. The point is, you must track your miles to determine that percentage was driven for business.
Actual Costs
This is the second part of the calculation. It’s also the easiest part as long as you ALWAYS use your debit or credit card when you pay. Don’t pay for things with cash. It makes it a lot harder to capture in your books, and it makes it harder to prove to the IRS unless you have the receipt.
To calculate your auto deduction you calculate your mileage deduction first. Let’s say the IRS gives you $0.60 per mile driven.
If you drove 10,000 total miles with 7,500 being for business, you would have a mileage deduction of $4,500 (7,500 miles x $0.60=$4,500).
Now we’ll take a look at your actual expenses. In this example lets say your total qualified auto expenses (gas, repairs, maintenance, licensing, insurance, lease payments if a lease, interest expense if a purchase, depreciation if a purchase) was $9,000. Since your business use was 75% (7,500 of a total 10,000 miles driven), 75% of $9,000 would be $6,750. You would get a $6,750 deduction for your business auto use.
V. Anything Else You Need To Know?:
- Personal use needs to be tracked. If you personally use your car, but don’t track anything the IRS will disallow 100% of your vehicle expenses.
- There are rules for high dollar vehicle limitations (think Porsche or BMW). The max cost allowed is $58,000 and limits depreciation, bonus depreciation and section 179 deductions on “Luxury Vehicles”.
- Your depreciation expense is directly affected if you buy a vehicle defined as a luxury vehicle per the IRS code. Your tax preparer should know these rules.
VII. Anything I Should Worry About In My State?:
Not really. This is one area the states have chosen to conform to IRS regulations. I haven’t found a state that doesn’t conform to the IRS mileage rate ($0.655/mile for 2023) One difference I do see is reimbursing your employee’s for mileage driven on their personal vehicles. This calculation changes based on the state. Since it’s too involved to go over here, my suggestion is to ask your tax preparer for guidance.
VIII. Who Can Help Me The Most?:
When it comes to writing off your self-employed auto deductions you really need to go to a licensed tax preparer. The IRS takes a look at around 8% of all filed returns. And the two categories they check the most are Meals and Entertainment, and Auto expenses.
Deducting your auto as a business expense is one of the most abused deductions available, and the IRS knows this. Stay out of their crosshairs by having a professional prepare your return.
While having a tax pro prepare your return is not a guarantee that they won’t call you out, the reality is most of that 8% referenced above is people who self prepare their return. Many years ago an IRS Revenue Officer told me that only about 2-5% of returns audited were prepared by CPA’s.
The IRS is a business unto itself. They will go after the low hanging fruit (self prepared returns) first, before going after someone who has competent representation (that would be the CPA).
Conclusion to Auto Deductions for the Self-Employed:
The key to maximizing your auto deductions is simple. You must track your mileage. I us MileIQ to track my driving and the beauty is, it only cost $60/year. Go to their website every week or month and designate which trips are business related and which are personal.
The reason for this is it will allow you to allocate your auto expenses on a pro rata basis.
As an example, Mary drove 10,000 total miles in 2022 split evenly between months. She tracked all her driving in Mile IQ and this revealed she drove 5,500 miles for business and 4,500 miles personally.
Mary also tallied all of her vehicle expenses (not including loan payments, but including the interest paid on the loan). This total came to $12,000.
Her mileage deduction calculation would look like this:
5,500 miles @ $0.585 = $3,217.50
4,500 miles @ $0.625 = $2,812.50
Total mileage deduction would be $6,030.00
Based on miles driven, total business cost is $6,600 (5500/5500+4500= 55% times $12,000)
Since the actual costs pro rated is more than the mileage deduction, you would take the actual costs as a deduction on your taxes.
And that’s how to calculate your auto deductions for self employed taxpayers.