If you’re using your personal vehicle for business, whether you’re a freelancer, small business owner, or contractor, you could be missing out on some valuable tax deductions. The IRS allows you to deduct many of the expenses related to the business use of your car, which can help reduce your overall tax burden. Here’s what you need to know to ensure you don’t leave money on the table when it comes to your vehicle expenses.
What Counts as Business Use?
Before diving into deductions, it’s important to understand what qualifies as business use of your vehicle. If you’re using your car to perform activities like:
- Driving to meet clients or customers
- Traveling between job sites or offices
- Running errands for your business (e.g., picking up supplies)
- Commuting to a temporary work location (not your regular commute)
These trips may qualify as business-related mileage. Keep in mind, commuting between your home and regular place of business is not deductible unless you have a home office that qualifies under IRS rules.
How to Deduct Car Expenses
There are two main methods for deducting your vehicle expenses: the standard mileage rate or the actual expenses method. You can choose the one that gives you the greater deduction, but you’ll need to track your usage carefully for either option.
1. Standard Mileage Rate
The standard mileage rate is the simplest way to deduct vehicle expenses. For 2023, the IRS set the rate at 65.5 cents per mile for business-related driving. To use this method, all you need to do is keep track of the number of miles you drive for business purposes. The calculation is straightforward: multiply your total business miles by the standard rate, and that amount can be deducted from your taxable income.
For example, if you drove 5,000 miles for business in 2023, your deduction would be:
2. Actual Expenses Method
The actual expenses method allows you to deduct the actual costs of operating your vehicle for business. This includes:
- Fuel
- Repairs and maintenance
- Insurance
- Registration fees
- Depreciation of the vehicle
- Lease payments (if applicable)
- Tolls and parking fees for business trips
To use this method, you need to track all the expenses associated with your car and calculate the portion that is for business use. For example, if 60% of your vehicle’s use is for business, then you can deduct 60% of your total vehicle expenses.
Keep Detailed Records
No matter which method you choose, keeping accurate and detailed records is essential. Here’s what you should keep track of:
- Mileage log: Record the date, the purpose of the trip, and the miles driven.
- Receipts for fuel, repairs, insurance, and any other expenses if you’re using the actual expenses method.
- Start and end odometer readings for the year (for both methods).
You can track your mileage manually in a logbook or use one of the many apps available, like MileIQ or QuickBooks Self-Employed, which automatically tracks your mileage as you drive.
Why You Should Take Advantage of These Deductions
Car expenses can add up quickly, and if you’re not tracking your business mileage or expenses, you could be missing out on a significant deduction. Using your vehicle for business purposes means you’re eligible to lower your taxable income, potentially saving you hundreds or even thousands of dollars in taxes.
Final Thoughts
If you use your vehicle for business, don’t forget about the valuable deductions you’re entitled to claim. Whether you opt for the standard mileage rate or actual expenses method, keeping thorough records of your car usage is key to maximizing your deduction.
Need help determining which method works best for you or navigating the tax process? At Jose’s Tax Service, we specialize in helping small business owners and freelancers take advantage of all available deductions. Contact us today to make sure you’re getting the most out of your car expenses!