Tax Tip Tuesday: Biggest Bang: Home Office + Vehicle

Tax Tip Tuesday

The self-employed can score a nice tax deduction for using their home and/or personal vehicle for business use.  And tax deductions reduce your taxable income, thereby lowering your tax bill.  Score!

First, let’s start with the vehicle.  The vehicle tax deduction is allowed for the business use of your vehicle. While you can and definitely should deduct a trip to visit a client, keep in mind that the IRS is not handing out deductions for business owners to drive their children to sports practices.

Business vehicles are cars, SUVs and pickup trucks that are used for business activities.

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The methods of deduction

There are two methods to calculate the vehicle tax deduction: the Actual Expense Method and the Standard Mileage Rate Method.  Both methods require you to keep track of the miles that you’ve driven on the vehicle for the year; total miles and then of that total, how many miles are for business.

You need to decide which method is most advantageous for you, ie provides the biggest deduction.  For example, if you are like me, I drive an economical vehicle which I keep until I drive it into the ground. The last vehicle I kept for 10 years.  In my case, I would do a standard mileage rate because use over the long term will give me the largest deduction.

But if you have a vehicle that has high gas mileage such as a full-size pickup truck, actual expenses may be better. Also, if you’d like to get a new vehicle every couple of years, actual expenses would be better for you because you will be able to depreciate that vehicle over the first five years giving you the biggest deduction.  Then you can move on to the next vehicle.

Since every case is different, you need to determine which method you’re going to use on your vehicle during the first year that you’re using the vehicle for business and then stick with that method. I always recommend to folks to track everything in the very first year to see what the deduction difference is and make the decision about what method to use for the vehicle. 

Here are the details of each option

Actual Expense: This is just what it sounds like.  The Actual Expense method requires you to add up all the money actually spent in the operation of your vehicle.  Then multiply this figure by the percentage of the vehicle’s business use.

For example, if half the miles you drive are for business and the other half are for personal use, you will multiply your total vehicle expenses by 50% to arrive at the business portion that is expensable.

Some of the costs you can include in your Actual Expenses are:

  • Lease payments
  • Auto insurance
  • Gasoline
  • Maintenance (such as oil changes, brake pad replacements, tire rotations)
  • New tire purchases
  • Title, licensing, and registration fees (not deductible in all states)
  • Vehicle depreciation (use a depreciation table to calculate the amount, and then deduct only the portion that applies to the business use of your vehicle)

Standard Mileage Rate:  This is a much simpler way of calculating the business use of your vehicle. It does not require you to track individual purchases and save receipts. However, you must still keep track of your mileage for the tax year. (Tip: Take a photo of your odometer on New Year’s Day and save it, so you can see where your mileage stood at the beginning of the tax year.)

As with other tax deductions, you must determine the percentage of your mileage that applies to your business.  Using the previous scenario, if half the miles you drive are for business and half are for personal use, you will multiply your total mileage by 50% to arrive at the business portion of miles.  Once you have determined your business mileage for the year, simply multiply that figure by the Standard Mileage rate.

For 2022, the Standard Mileage Rate is 58.5 cents for January through June and 62.5 for July through December.  This mid-year rate change was established by IRS to adjust for the increase in gas prices.

When taking the standard mileage rate, you cannot take any other expenses of your vehicle. Essentially the IRS’ allowed standard mileage rate is inclusive of expenses related to operating a vehicle.

Second – Now here’s where you score the biggest bang for your tax-deductible buck.  Couple a home office with your business vehicle. 

When you take the Office in Home deduction, you double your tax benefit.  First, it increases the number of business miles that you can claim on your tax return.  This is because you can claim the miles from your house (your office location) to your first client stop as business miles.  Then when you come back home, you can claim your last client stop and your return home for business miles as well. 

If you don’t have an office in home, going from your house to the first stop of the day is actually your commute.   Likewise, your return home from your last stop of the day back home is considered a commute as well.  Commute miles are not deductible.

Second, the Office in Home gives you a deduction for the office expense itself.  This can be either a percentage of all of your expenses of the home (office space as a percentage of the entire home) or you can use a standard rate calculation of $5 per square foot multiplied by the office space.  To claim the home office deduction on your 2022 tax return, taxpayers generally must exclusively and regularly use part of their home or a separate structure on their property as their primary place of business.

Here’s the grand finale! Every business deduction that you take provides a DOUBLE SAVINGS on your taxes.  A deduction on your business income reduces not only your taxable income, but also it reduces your income for calculating Self-Employment Tax, which is equivalent to Social Security and Medicare.

If you are not sure you are scoring the biggest bang for your tax-deductible buck, contact us.  My staff and I love helping clients score tax savings using allowable tax deductions.  Our passion is helping you experience a Less Taxing Life and More Prosperous Solutions.

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