How to Deduct Your Vehicle Expense¹
If a vehicle is purchased and used by the business it can be classified as a business expense, thus being able to reduce a business's taxable income. There are two ways to deduct a vehicle expense: Actual Expense and Standard Mileage Deduction.
This method allows you to take the actual costs of operating the vehicle and use that as your expense. The costs could include fuel, maintenance, and insurance. Also, the actual cost of the vehicle itself can be depreciated over a period of time. That depreciation each year would then be the amount that can be expensed.
Standard Mileage Deduction
This method allows you to expense based on how many miles that are driven with the vehicle. With this method you do not need to keep track of any costs of operating the vehicle, just the number of miles driven. You would then multiply the number of miles driven by the current standard mileage rate. For example, the mileage rate for 2018 is 54.5 cents per mile. If a company drives 10,000 miles in one year then the Standard Mileage Deduction would be $5,450.
You can choose whichever method you want to use for your vehicle(s) expense. However, if you choose to use the Actual Expense method you cannot switch to the Standard Mileage Deduction. If you use the Standard Mileage Deduction you can switch to the Actual Expenses method as long as the vehicle is owned and not leased.
It would be advantageous to choose the method with the potential for your company to save the most money and provides the greater tax savings.
Let’s look at an example. Say that a company is purchasing two vehicles for its employees, one for a sales rep and one for an operations manager. Because one of the vehicles is for a sales rep required to drive a lot to cover the territory, the company is estimating this person will put about 25,000 miles on the vehicle per year. The company is estimating the operations manager will only put about 10,000 miles on the vehicle per year.
How to Choose between Actual and Standard Mileage
Let’s determine which method would be more prudent for the company. Using the Actual Expense method, the company is estimating that the total actual costs of operating the sales rep vehicle, which would include fuel, maintenance, insurance, and depreciation, would cost $10,500 per year. For the operations manager vehicle the company is estimating the cost would be $8,500 per year.
Using the Standard Mileage Deduction the company would multiply the amount of miles the employee is expected to put on the vehicle by the current mileage rate. According to the IRS, the current mileage rate is 54.5 cents per mile. The total Standard Mileage Deduction for the sales rep vehicle would be 25,000 x $0.545 = $13,625. The total Standard Mileage Deduction for the operations manager would be 10,000 x $0.545 = $5,450.
Depending on the objective of the company, the company can decide which method to choose. For the sales rep vehicle the Actual Expense method would cost $10,500 whereas the Standard Mileage Deduction would cost $13,625. For the operations manager vehicle, the Actual Expense method would cost $8,500 per year whereas the Standard Deduction would cost $5,450. If your company needs a bigger expense for tax purposes then for the sales rep car it could choose the Standard Mileage Deduction. However, for the operations manager vehicle it could choose the Actual Expense method.
If an employee uses the company vehicle for personal use then the value of personal usage must be reported as taxable wages for the employee unless:
- The car was used exclusively for business;
- Any personal use is too minor to track;
- Any substantial personal use was tracked and the employee reimburses the company for that value.
It is advisable to seek the assistance of an accountant to help you make the most prudent decision for your business.