Deductions for Your Business
This is for sure in the top 5 conversations that we have on a regular basis with newer business owners: “Can I deduct my car payments? If I buy a new vehicle, will that help me on my taxes?” Answer: Likely yes, buut it depends.
DISCLAIMER: This is a very brief summary and you should check with your tax advisor for your specific fact pattern before taking any tax positions.
Option 1: You can deduct a standard amount per business mile that you drive in a year. The IRS updates this rate every year depending on gas prices and such. For example, the rate for 2020 is 57.5 cents per mile. So if you drive 10,000 miles for business in a year, multiply that by .575, and you can deduct $5,750 for mileage. This rate is intended to cover ALL of your vehicle expenses (sometimes not interest on a note), including depreciation of the vehicle, gas, repairs, maintenance, etc. When you use the standard mileage rate, you do not have to keep ANY receipts for gas, repairs, maintenance, etc. Wow!
Then, there’s the dreaded look we see on people’s faces when they think about keeping a paper mileage log: “You want me to do what?” Eeek. The answer is yes, you do have to have substantiation for what the business mile was driven for, business purpose, etc. In former times, yes, you had to have written documentation; however, there are several different software solutions out there that make it so much easier!
If you are using QuickBooks Online (QBO), there is already a mileage tracker built in for you! It operates in the background based on your phone’s GPS coordinates. The user then goes in on some frequency and identifies trips as business or personal. You can identify your home and work locations and it will code those trips automatically. You can also identify key vendors or customers that you frequent and not have to code those trips. Slick automation! We love it. TIP If you don’t have QBO, MileIQ is our favorite stand-alone mileage tracking app.
Option 2: You can deduct the actual expenses that you incur for business mileage. Given the vehicle is 100% business use, you can generally depreciate the vehicle itself (some limitations are in place), and deduct all of your gas, repairs, maintenance, etc. The downside of this: you MUST keep all of your receipts. You then have to account for and summarize all expenses. If your vehicle is less than 100% business use, but more than 50% business use, you can deduct the respective business-use percentage of your expenses.
Please note that these concepts apply with vehicles that are purchased, there are several other items to consider with leased vehicles outside the scope of this post. Again, there are many facts to consider as you decide; however, we generally default to Option 1. It’s quicker, easier, fewer receipts, and generally is a very fair deduction. We generally do recommend the actual method for vehicles that are more expensive ($50K plus), trucks pulling trailers that use a lot of gas, etc.
If you have any questions, please don’t hesitate to reach out to us! We’re happy to have a conversation.