Ann Landers once said, “A person doesn’t know how much he has to be thankful for until he has to pay taxes on it.” But I am of the position that a person doesn’t know how much he has to be thankful for until his tax strategist shows him how much he can SAVE on his taxes!
So with that mindset, let’s look at how the business use of your vehicle can be used to garner tax deductions which reduce your taxable income, thereby lowering your tax bill.
There are two taxpayer scenarios to consider:
- The Employee of a Company
- The Self-employed Business Person
For the employee of a company. In years past, employees were allowed to claim deductions for their unreimbursed business expenses as itemized deductions on their tax return. This would be for such things as unreimbursed travel, supplies and other business expenses. Previously, an employee’s tax deduction for their unreimbursed employee business expenses could only be claimed if they itemized their deductions (as opposed to claiming the standard deduction) and was only allowed to the extent the total of these expenses exceeded 2% of their adjusted gross income (AGI).
Here’s the bad news…. The Tax Cuts & Jobs Act eliminated this option. Furthermore, it will not be returning before 2025. Expenses such as union dues, work-related business travel, or professional organization dues are no longer deductible, even if the employee can itemize deductions.
But wait! Even if you are an employee of a company, there are special circumstances when you can claim a few travel-related expenses as follows:
- If you own rental property, you may claim the mileage driven to and from your property when you go to maintain or check on it.
- Transportation expenses—including parking and tolls—for volunteer work (including nonprofit board meetings) are considered charitable donations and may be deducted at a rate of 14 cents per mile.
- If you incur medical expenses of over 7.5 percent of your adjusted gross income (AGI) you may deduct health-related travel expenses. This includes travel to the provider and parking as well. The rate is 16 cents per mile.
- Fines for traffic tickets are never deductible.
For the self-employed business owner. If you use a vehicle as part of your business operations, such as to deliver products or drive to worksites, your company may be eligible for certain tax deductions. But there are a few important details to consider so you know what you can include, when you can do it, and how to write off these expenses.
The definition. The IRS defines a car as any four-wheeled vehicle—including a truck or van—intended for use on public streets, roads, and highways not exceeding 6,000 pounds in unloaded gross weight. Exceptions include ambulances, hearses, vehicles used to transport people or property for money or hire, or trucks or vans that are qualified nonpersonal use vehicles.
There are 2 different ways to claim these deductions:
- Mileage Deduction – Multiply the actual business miles driven by the standard mileage rate which is 58.5 cents for miles incurred Jan thru June and 62.5 cents for miles incurred July thru Dec. Commuting miles, miles driven from your home to your work, are not deductible. With the standard mileage deduction, you can’t include other costs related to your car except for business-related tolls and parking fees. However, parking fees for your workplace aren’t deductible since they’re considered commuting expenses. There are a few other restrictions established by IRS for using the mileage deduction which should be considered before claiming the mileage deduction.
- Actual Expense Deduction – Take the actual car expenses by keeping track of all qualifying car-related expenses. If you drive your car for both personal and business use, you can only deduct the percentage used for business. IRS allows the following actual expenses: depreciation, licenses, gas, oil, tolls, lease payments, insurance, garage rent, parking fees, registration fees, repairs and tires.
Since IRS allows expensing depreciation, you can do that by first applying the percentage of business use to the value of your vehicle. This is the amount you can depreciate. Then there are a variety of limits of how much depreciation you can take that are tied to the type of vehicle and the gross vehicle weight. These limits also apply to when and if you can write off the entire amount of the vehicle in the first year.
Whatever method you use on your tax return, it is essential to document your expenses in the event your taxes are audited. Keep both a mileage log as well as receipts to back up your claims.
Be sure to ask your tax strategist which option is the best fit for your situation so that you can SAVE on your taxes. There is never a cut and dry answer for taxes because every person’s situation is unique. But with the right tax strategist, you will be more thankful to pay less tax.
If you would like us to help you experience a Less Taxing Life and More Prosperous Solutions, contact us at 301-714-2071 or at www.SaundersTax.com to schedule your consult today.