Business owners can expense their business-related automobile expense, and not just by taking the standard mileage rate. I’ve found that some business owners are not the best about documenting how much they actually drive for work. A lot just sort of guess. They will drive to the office supply store, meet a customer, the post office, the bank, meet another customer, and to drop off items for business purposes — and that can all be written off. The rate for 2024 taxes is 67 cents per mile, but I’ve found that many business owners don’t know they can deduct those expenses.
This only applies to business owners or those who are paid on 1099, not W2 employees, sorry!
The Tax Cuts and Jobs Act gives a nice tax break to business owners. To make this happen, you need to take your personal vehicle and make it your Business vehicle, or just buy a vehicle in the company name which can be harder if you’re getting a car loan. Your former personal vehicle will then be able to generate you a tax deduction of up to the business use percentage. It must be used more than 50% for business for this deduction.
If Dr. Jenny has a car worth $40,000 and its under 6,000 lbs, makes it her business car and she uses 60% for business; 40% personal, she can write off up to $12,200 for 2024 on a bonus depreciation qualifying vehicle. If a vehicle is over 6,000 lbs like a large SUV, you can deduct up to $30,500 under 179. It doesn’t matter if you have a loan balance on the car or not. If you use a vehicle for less than 50% for business, you must use the mileage deduction.
Now the thing is, you must drive it mostly for work purposes, not just commuting to work. Some business owner clients have more than one business, so track mileage for each vehicle separately. I recommend clients use an app like Mile IQ or QuickBooks to make it easy.
When you take a personal vehicle and convert it to business use, under the eyes of the IRS they see you as placing the car ‘into’ the business at that time. That means you can start depreciating the car and claim the associated deduction.
To determine how to do that, you use the lesser of the amount of the fair market on the date of conversion from personal to business use or use the adjusted basis of the car. Generally, you look at the Kelly Blue Book or other sales price on the date you convert it to come up with the fair market value.
It’s a cool tax deduction.
Keep in mind, you STILL get to deduct your operating costs, like gas, insurance, oil changes, maintenance, repairs, car washes, repairs, car loan interest, parking and tolls, sales tax paid on the vehicle, license and registration, tires, those little pinecone air fresheners, and on and on!
Taxpayers will want to evaluate whether to deduct the car all at once with bonus depreciation, or take it over 5 years using regular MACRS depreciation, and compare that to the mileage deduction. You cannot switch back and forth from actual cost to mileage on the same vehicle.
The majority of our self-employed and business clients are legitimately writing off $10,000+ in car deductions annually. It depends on how much you drive for work purposes and the value of the car.
The more business miles you drive, the more of a tax deduction you will have. The IRS uses the miles you drive, and the percentage of those miles driven for business vs. personal to determine your allowable deductions.
The records and documents required to support auto expense in case of audit may include a mileage record, that shows every drive the taxpayer took, showing what is business and what is personal. Receipts for gas, insurance, repairs, and all car expenses should be kept. If a new car is purchased, keep the dealer invoice, as it will list the price and taxes and license fees which are also deductible.
I recommend you keep every piece of paper or digital record as evidence of your deductions in a neat, orderly file, in case of audit. Your accountant will probably just want to the totals, but the IRS may want to see the actual source documentation if you get audited. They will probably want to see your appointment book or a printout of your work calendar to corroborate your business use.
Just putting a magnetic sticker on a vehicle doesn’t automatically make it a 100% work use vehicle.
The 90-day log is where a taxpayer is allowed to meticulously track the mileage and expenses as explained above, then multiply that out by 4 and use that as the yearly number.
Just be reasonable and keep your records, and enjoy this great tax deduction!