Actual auto expenses or standard mileage rate? Which business deduction method will cut your taxes more?
This post was updated March 14, 2018.
Driverless cars, like the Google prototype from a few years ago pictured below, are still far from reality. But it's something to think about, especially if you use your vehicle for business.
It has no steering wheel, accelerator or brake pedal to mess with. You use your smartphone or tablet app to summon the vehicle, set your route, get in and go. Then just sit back and enjoy as the Google machine takes you to your destination.
If it's to a business meeting, you can use the time you otherwise would be driving to polish your presentation. Or you can call your spouse to ask him or her to pick up dinner or the cleaning or the kids. Or you can just relax so you'll be in the best frame of mind for your important professional encounter.
Of course, it will be a while before driverless vehicles are available on a large scale. And there's no indication yet as to what one will cost.
So for now, all of us who drive for business purposes are stuck with our current technology.
Deducting business travel: Regardless of whether we're driving a high-tech auto like the Google-mobile or our 21st century versions, some taxpayers still can take advantage of the tax deduction for business use of their autos.
But sometimes we don't make maximize this tax break.
Business filers generally have a choice in deciding how to deduct their miles, the standard mileage deduction or the write-off using actual auto expenses.
Making the correct choice could mean more tax savings.
Actual auto expenses: As the name indicates, here you keep track of your vehicle's actual expenses — another reason to have a good business record keeping system.
Allowable auto costs include gas, oil, tolls, parking fees, insurance, repairs, registration costs, garage rent, tires, repairs, depreciation or lease payments and, of course, mileage.
If you use your car exclusively for business purposes, add all these up and that's what it costs to use it to do business and what you can deduct.
If, however, you use your auto for business and personal driving, you can only deduct the portion related to your work. You must divide your expenses between business and personal use.
You can do this, says the Internal Revenue Service, based on the miles driven for each purpose. Here's an example:
You drive your car 20,000 miles during the year: 12,000 miles for business and 8,000 miles for personal use. You can claim only 60 percent (12,000 ÷ 20,000) of the cost of operating your car as a business expense.
The percentage also applies to a tax deduction that most of us can't claim any more, auto loan interest.
If you are self-employed, use your car in your business and are paying off a loan on that vehicle, you can deduct that part of the interest expense that represents your business use of the car. In the example above, that's a deduction of 60 percent of the vehicle loan's interest.
Standard mileage method: The other auto expense deduction method, claiming the standard mileage deduction rate, is one that lots of us use because it's easier.
This rate is adjusted annually for miles driven specifically for business. The depreciation component is factored into the rate that the IRS releases each fall.
For 2018 business use of your car, you can claim 54.5 cents per business mile. That's a penny more than in the 2017 tax year.
Just take all the miles you drove for your job and multiply it by that amount.
Yes, you still have to track your mileage, but don't have to worry about that extraneous auto stuff.
Do, however, hang onto parking and toll receipts. Under the standard mileage rate deduction method you still can add to your deduction amount any parking fees and tolls incurred for business purposes. The IRS makes this exception since these rates tend to vary regionally.
Choose carefully: You need to be a careful and comparative shopper when it comes to deciding which auto deduction method to use.
Many folks automatically think that the more complicated actual expenses method will automatically provide a bigger tax deduction. Not necessarily.
As in other tax situations, you or your tax adviser need to run the numbers -- which means hanging onto to all those auto receipts so you can do the math.
Also note that if this is the first time you're using your car for business, you might want to opt for claiming the standard mileage rate anyway. Why? Because it gives you more choice down the tax road.
If you opt for the actual expenses method initially, you're stuck with it for as long as you use that vehicle. This method might be right for you if you expect several years of depreciating your vehicle will bring down the tax bite. But if that changes, too bad. You're still you're stuck with claiming actual expenses.
If, however you claim the standard mileage rate when your car is first available for business use, you can switch to the actual expenses method later if that's a good move.
But if you started using the standard mileage rate for a leased car, you can't change to the actual auto expenses method during the lease term.
So talk with your tax professional and make the appropriate auto expense deduction choice for your business and your tax situation.
Self-employed vs. employee auto expenses: The tracking of business miles is especially important if you are your own boss. These miles and/or other work-related auto expenses are claimed as part of your business filing.
I do so every year on the Schedule C that I file along with my personal Form 1040.
Sometimes, though, employees use their own cars to take care of business-related work. When they aren't reimbursed, they've been able to count those business expenses as miscellaneous itemized deductions on Schedule A.
This amount must exceed 2 percent of your adjusted gross income (AGI) to be worthwhile, but some salaried workers find they can clear this AGI hurdle. Or could until this year.
The 2017 tax year, for which returns are being filed now, is the last one for a while where workers can claim itemized unreimbursed business expenses or any other miscellaneous costs. That option was eliminated as part of the tax law changes in the Tax Cuts and Jobs Act (TCJA) that took effect beginning with the 2018 tax year.
The individual tax provisions in the TCJA are temporary. They're set to expire at the end of 2025.
Maybe by that time, Google and other auto makers may have self-driving cars running on all of America's roads!
You also might find these items of interest:
- 5 ways to maximize tax-deductible business entertainment
- IRS offers an easier way to deduct your home office
- What are ordinary & necessary business expenses? It depends