(TL;DR at bottom)
This is question that I get all the time. “If I put my car in my company’s name, it is a company car, right?” Nope. “If I put magnetic signs on it, it is advertising when driving it around, right?” No. “I did not keep track of my mileage, I’m just going to deduct my gas, ok?” Nope again. “But the only reason I bought this truck is because of the business. It has to be a deduction!” Uh, no. The IRS has rules. LOTS of rules. They have entire publications of rules just on cars and trucks. We are going to break down the basics today.
What you CAN NOT “Write Off” or Deduct
You can NOT deduct the entire cost of a vehicle that you just bought.
You can NOT deduct your vehicle payments. (here’s why)
You can NOT deduct your personal trips as advertising because your car is wrapped. (You deduct the cost of the wrap.)
You can NOT deduct your personal vehicle as a business expense because you titled it in the business name.
You can NOT deduct driving back and forth to work every day. Commuting to work is considered personal use. Yes, even if you are self-employed. If you have a main place of work that is not your home, driving from your home to that place is not a deduction, ever.
The IRS has clearly thought this through and is quite articulate about people buying cars and writing them off as business expenses. You are not the first person to think this, or to try to deduct the ‘company BMW’. They will pounce if they sense any overstepping of their rules.
So, what CAN I deduct?
You can deduct the cost of operating your vehicle for “ordinary and necessary” business travel. That’s it.
No personal use.
No commuting.
No averages or guessing.
Ordinary and necessary business travel only.
Some examples are: driving to see clients or customers, driving to your suppliers to pick up materials, driving to the office supply store to get sticky notes, driving to the hobby store to get some office decorations, driving to the post office to ship your products, driving to business meetings at a restaurant, driving to conventions or classes to maintain your licenses, and anything else that you need to do to conduct business.
So…. What if the office supply store is right next to my kid’s daycare… can I go in and buy something and write off the trip? Technically, yes. If you get audited, do you think that the IRS will consider going to the office store every single day to buy one stamp ‘ordinary and necessary’? NO. You can’t make ridiculous claims and expect them to be accepted. But, can you make a regular trip to the office supply store, pick up your kid next door, and still write off the trip? Yes. Can you do your grocery shopping at the big box store on the same trip as when you are buying cleaning supplies and coffee for the office? Yes. Can you plan your trips so you get the most bang for your buck? Of course!
How do I prove my business driving?
You need to prove 3 things:
- That you were there,
- that you had a business purpose for being there, and
- that you drove your car there.
The first and second items can be proven with a receipt if you spent money or delivered something. If you did not spend any money, such as to do an estimate or look at a job, your calendar or mileage log is sufficient proof. Almost every case in tax court where the taxpayer has a ‘timely updated log,’ it is accepted as evidence.
Keeping a current calendar or log of your travels is probably the one most important thing you can do to prove your business driving. If you can go to the IRS and say, “This is exactly how I figured out my deduction,” they are more likely to believe you than if you just have a bunch of random gas receipts.
How do I prove which car I drove?
How do you prove the second part, that you drove your car there? How do they know that you didn’t take your spouse’s car or the bus, or if you hitched a ride with your Uncle Freddy? Can you remember the days you took your spouse’s vehicle to a job? How do you prove it? Well, technically you can’t. But you can prove that it was highly probable. You do this by first showing that you incurred expenses for the travel, and second that the vehicle in question traveled enough miles to cover your business and personal miles.
You prove the expense part by showing ownership of the vehicle and paying insurance, and by having sufficient fuel and repair receipts. You prove the miles traveled two ways. Your ‘timely updated log’ or mileage app should have regular odometer readings. Second, and better, is third party verification of the miles traveled. Every time you get an oil change, they note the odometer miles on the receipt. Every time you get tires, they note the odometer miles. Repair warrantees count on mileage, so they always record it on the receipt. These receipts are worth their weight in gold at an audit.
I once had a client that claimed over 40,000 business miles for his job. He did not have good records. What he did have is an oil change in February and tires in November and almost 60,000 miles traveled in ten months. The IRS decided to drop it and find someone easier to audit.
How do I deduct my car expenses?
There are two methods to deduct your expense – Mileage or actual costs. How do you decide which one to use? You can use whichever gives you the better deduction. Here in the mid-west, mileage almost always wins unless you have a vehicle that idles all day. It you are in a large metro area with a high cost-of-living, you might compare methods to get the better deal.
“Mileage” (the standard mileage rate) is an amount per mile that the IRS sets each year that is the average cost of operating a vehicle in the US. Mileage includes insurance, tires, oil changes, tags, taxes, fuel, wear-and-tear, EVERYTHING. You cannot take a mileage deduction and then take oil changes and tags as an expense. You cannot take depreciation on your vehicle then also take mileage. “But Diane, I had to replace the engine. The repairs were over four thousand dollars.” Well, then you cannot take mileage if you are going to deduct the repairs.
Surprisingly, the recordkeeping for both methods is the same. If you use the actual cost method, you need to keep track of the mileage and report it. If you use the mileage method, you still need to able to prove that you were paying the expenses for the vehicle. You can’t use your mom’s car to run errands and then take the mileage deduction, because you didn’t incur all the expenses for the car. (She is paying the payments, insurance, repairs.) You can reimburse you mom, though.
Mileage is only an option on passenger vehicles under 6000 lbs. You also cannot use it for taxis or if you have five or more business vehicles operating concurrently. You can find the current mileage rates here.
What about driving for my W2 job?
Since 2018, driving for your W2 job is no longer a deduction. If you are not the business owner, you cannot deduct your driving. You need to get reimbursed from your employer.
Is it a company car?
I have people ask me all the time if their new vehicle should be titled to the company. My standard answer is, “Ask your insurance person.” Some vehicles are cheaper to insure as commercial, some are cheaper as personal. Discuss how you will use the vehicle and secure proper insurance that covers how you are using it in business. That will generally lead you to the right answer on who should title the vehicle.
Just because it is a “company car” does not mean all its expenses are one giant tax deduction. Personal use is never deductible. If you are also using it to pick up your kids and drive back and forth to work, personal miles are considered W2 income to the user (or owner draws if you are a sole proprietor). This is often a hot audit topic and typically easy money for the IRS.
Summing up <TL;DR>
- Keep a mileage log or mileage app that records your odometer readings. You can also use your daily calendar if you record where you go.
- Take a picture of the odometer in your car from time to time, especially when you buy or sell a vehicle.
- Keep all receipts for fuel (or credit card/ bank statements). Keep your insurance, registration, and tax information. Keep ALL repair receipts.
- Be sure the business purpose for your trips is stated on your receipts or calendar.
- If you have employees using their own cars, they need to give you receipts and business purpose before you reimburse them.
- Remember that personal use (including commuting) is never deductible.
