If you drive for work, claiming a vehicle deduction can be a huge money saver. The IRS allows for 2 deduction methods: the standard mileage deduction or actual expenses.
The standard mileage deduction.
The biggest advantage to choosing the standard mileage deduction? It is the simplest method to use: simply maintain a detailed mileage log which meets the IRS requirements.
You can opt to use a simple spreadsheet and manually track mileage and, at a minimum, the:
- DATE of the trip
- PURPOSE OF THE TRIP. This should explain what you were doing at the location (eg. “Showing a property”).
- EXACT MILEAGE driven.
- TRIP DESTINATION. The name or address of where you went. This should be as specific as possible (You cannot say “downtown” or “Hollywood”).
The biggest downside to the manual entry method is forgetting. And this is a big risk. If you are audited, the IRS will ask for a copy of the log to verify the deduction.
Your other choice is to use a mileage tracker app or device. These make it less likely to forget to record your mileage. The better ones will track and input all of the necessary data automatically
The biggest risk is with many apps failing to start, forgetting to stop the app from automatically recording personal miles, and even failing to start recording.
Taking the standard deduction:
Each year the IRS sets the deduction rate for work miles driven. For 2018, that rate is 54.5¢ per mile. To take the deduction, simply multiple the rate by the miles driven from your log.
The actual expense deduction.
As implied, you will be recording and claiming all of the actual expenses incurred.
These expenses include:
- Maintenance (oil changes and routine service, repairs, tire replacement, etc)
- Licensing, registration, and insurance fees
- Monthly purchase or lease payments (subject to IRS Lease Inclusion Amounts)
In addition to the actual expenses, you will also be able to take the allowable depreciation.
What is Depreciation?
Depreciation is the percentage of value you can deduct off your car on an annual basis. The IRS limits the allowed amount and full depreciation can take far longer than one might realize. There are two categories: one for passenger autos, and another for light trucks and vans. Below is a table for used and new vehicles starting depreciation in 2017.
*Savvy taxpayer loophole: If your vehicle is over 6,000 lbs-which many large SUVs are- you are exempt from the luxury vehicle restrictions and can deduct up to $25,000 in your first year. –smbiz.com
*Note 1st year New rates based on 2017 50% bonus depreciation. Rates subject to go down in 2018 to 40%
Figures provided by KUTCHINS, ROBBINS & DIAMOND, LTD.
For example, say you purchased a $41,000 vehicle in 2017 and used it 100% for business purposes. No matter how expensive your vehicle is, the maximum amount you can deduct in 2017 will be $11,160. Based on the rates above, it will take 15 years to fully depreciate your vehicle.
AND YOU STILL NEED A MILEAGE LOG!
To claim this depreciation and to determine the amount of the itemized expenses you can deduct, you will need to verify the percentage the vehicle was used for business!
The biggest disadvantage with the actual expense method – there is plenty of record keeping involved. You still need the detailed mileage log and you need to accurately record all expense, then determine the percentage able to be deducted.
So which method is best?
As much as we hate to say it, that depends. Which is better for you will likely come down to the age of your vehicle (which affects insurance costs, fees and the cost of maintaining it) verse the miles driven.
The actual expenses for a brand new, fuel efficient Honda or Toyota with a lease payment of $199 per month, requiring nothing more than routine maintenance for 3 or more years and a cap on depreciation will likely be fairly low. Unless you drive very few ‘deductible’ miles, the standard deduction will likely be higher.
If, however, purchased a luxury car with poor gas mileage and higher routine maintenance costs, the result could be different.
Our best advice is to look at historical data for your current vehicle’s expenses and your mileage over the past several years to help decide, talk to an accountant (especially if purchasing a new vehicle) or track both and decide later.
A second consideration
If you opt for the actual expense method to take advantage of the higher 1st-year appreciation, be aware that you will not be able to use the standard mileage deduction in subsequent years. If you chose the standard mileage deduction, you’ll have some flexibility later.
About that mileage log…The hard truth – regardless of which method you choose, if you claim the vehicle deduction, you’ll need a log to stay compliant with the IRS.Click To Tweet
Above and beyond the deduction methodRegardless of the vehicle deduction method chosen, mileage or actual expenses, there are additional common operating expenses which may be deducted. Click To Tweet
- Parking fees
- Membership fees
Be sure to save all of those receipts!