Car and Truck Expenses

This is one of the most common and most generous deductions small businesses can take advantage of. It includes both cars and trucks Even if the car is only partially used for business purposes, the expenses can still be deducted to the extent that the car is used for business trips. Auto expenses are allowed even if the car is leased or financed and even if it is not owned or leased by the business. It is very common for business owners to use their car both for business and personal needs, so let's first define what a business purpose is.

Business purpose: while self-intuitive in most cases, it is important to clarify some common confusions. Commute to regular place of business is not considered a business use. Driving to meet clients, transporting goods and people for money are all examples of business use. It is the company’s responsibility to keep a log of miles driven for business. the number of miles driven for business divided by the total miles is the business use percentage. For example, in 2023 the company ABC drove a total of 1,000 miles from which 200 were personal miles of the owners. 200 / 1,000 x 100% = 80% is the use percentage. Multiplying it by total car expenses we can get the tax deductible part. So, if the total car expenses are $500 then $500 x 80% = $400 that is tax deductible. Now, let’s see how we calculate the expenses. There are 2 ways allowed by IRS:

  • Standard Mileage

  • Actual Expenses

Standard Milage

This is a generous and a simplified calculation method for small businesses that have less than 5 cars. The miles driven for business are multiplied by the standard mileage rate. For 2023 the rate is $0.655. So, if the company drove 1,000 miles for business, the tax deductible expenses will be 1,000 x $0.655 = $655. When using standard mileage, you can no longer deduct actual expenses such as car insurance, gas, maintenance and repairs, lease payments, depreciation or registration. You can still deduct parking and tolls as well as interest paid if the car is financed. If you start using standard mileage for a given car you should use it for the lifetime of the car. Standard mileage is limited to cars, vans, pickup trucks and some small trucks. Large commercial trucks cannot use standard mileage.

Actual Expenses

Just like the word suggests, these are actual expenses spent on a business car or a truck. It includes the following:

  • Gas

  • Repair and Maintenance

  • Car Insurance

  • Lease Payments

  • Registration and Title

  • Depreciation

The total spent is then multiplied by the use percentage and the result is tax deductible.

Depreciation:

While most of the expenses are pretty straightforward, the depreciation requires additional attention. When buying as assets that has a lifetime of over 1 year such as a car, the full price cannot be deducted immediately. Instead, it needs to be depreciated over time. The most common way of doing it is with the straight-line depreciation. The total cost is divided by the useful life of an asset and the result can be deducted each year until the asset is fully depreciated. For cars the useful life is 5 years. For example, the cost of the car is $20,000. 20,000 divided by 5 = 4,000. $4,000 is the amount that can be deducted each year for the next 5 years. Contrary to straight-line, section 179 depreciation allows a larger depreciation for the first year when the car is placed in service as longs is it is used for business more than 50% of the time. Bonus depreciation is another special provision put into effect during Covid that allows businesses to deduct up to 100% of the asset during the first year of use. For 2023 the limit was reduced from 100% to 80%. So, a car bought at $20,000 can be written off up to $16,000 during the first year.

Actual expenses method also allows adding tolls, parking and interest. If for a given car, actual expenses method was used during the first year of service, it cannot be changed to standard mileage in the future.

If the car is not registered under the business, but is used for it, it is still possible to deduct expenses. If the business is an LLC or sole proprietorship or general partnership, the owners can deduct their car expenses just like if it was registered under the entity. Employees of those entities will need to submit reimbursement requests when their cars are used for business purposes. The reimbursement is tax deductible. For corporations, owners or employees must submit a reimbursement request when the car is used for business and the reimbursement is typically tax deductible.