What are the rules surrounding business use of personal vehicles?
Is business use of personal vehicles a good practice? And is it better to use the standard mileage rate as your deduction or the actual expenses? My answer is “You should talk to your tax preparer.”
This is because how and when you deduct for the business use of those vehicles can have significant tax implications and varies depending on entity structure. However, I hate to leave y’all hanging so here are some general guidelines from the IRS.
Who should own the vehicle?
It’s common practice to lease a building or land to your business. However, leasing a car to the business is complicated and may not result in the tax savings you think it will. Especially if you are a sole proprietor and/or you also use it for personal transportation. Additionally, there may be legal and insurance liability issues.
Selling your personal truck to your business is also an option. Doing so can increase the value of your busines on paper; but once again there are tax implications to consider. For instance, some or all the money you receive in the sale could be taxable to you personally. I would also warn that, if there is a lien on the vehicle, you should be cautious, as you do not want to mix your personal liabilities into the business.
If considering either option, get advice from your attorney, insurance agent, and tax expert.
Personally I would keep the vehicle in my name and deduct the business use of a personal asset.
Should I track my mileage?
Generally I tell people to track both mileage and actual expenses then let their tax professional figure it out. This is because which method to use is a numbers game that can change from year to year. And because the percentage of business use determines the amount of actual expenses that can be deducted.
When it comes to using the standard mileage rate, there are a couple of things to consider early on.
- You must choose to use the standard mileage rate in the first year you use your car for business. After that you can choose to use whichever method yields the higher deduction. Junkers frequently assume that they will get the higher deduction from actual expenses because of fuel costs but that is not always the case. I have a client who consistently makes out better using mileage. So if you are in your first year and you didn’t make a big profit, I would consider taking it.
- If you want to use the standard mileage rate for a car you personally lease, you must use it for the entire lease period
What is involved in using the standard mileage rate?
The IRS allows employees and self-employed individuals to use a standard mileage rate, which for 2020 is 58 cents per mile.
Of course, this is only applicable to the number of miles driven for business. Miles that count as part of your business mileage deduction include the number of miles actually driven for business. This includes travel to meetings, the bank, and from job site to job site.
Some travel is not considered business-related. Such as commuting from home to your workplace, from a job site to pick up your kids at school. And no, just because your truck is wrapped with your logo, taking your spouse out on date night does not qualify as a business trip. Tax law will not support this argument.
You can also deduct interest on an auto loan, registration and property tax fees, and parking and tolls in addition to the standard mileage rate deduction, as long as you can prove that they are business expenses.
The mileage deduction can add up and is easily taken advantage of so the IRS pays attention. Be sure to track your business mileage. Write down the odometer reading on the day that you start using a vehicle for business and on the day the year ends. And in between keep records of your business use.
It doesn’t have to be complicated. If you like pen and paper keep a pocket notebook in your console and make daily entries. “Sept. 20 I did jobs for Jim Jones, Jane Doe, and Joe Plumber. Starting odometer reading 15,150. (By starting I mean from Jim Jones’ house since commuting isn’t deductible) Ending odometer reading 15,329. (the odometer reading before leaving Joe Plumber’s house since commuting isn’t allowable)”. If you prefer using technology, use the features found in QuickBooks Online, Housecall Pro, or a variety of other stand alone apps.
What vehicle expense are deductible?
If you decide to use the actual expenses method, additional auto-related expenses are deductible, such as,
- Gas and oil
- Maintenance and repairs
- Registration fees and taxes*
- Vehicle loan interest*
- Rental or lease payments
- Garage rent
- Tolls and parking fees*
*Also deductible if you choose the standard mileage method
KEEP RECEIPTS! Some of the accounting apps allow you to attach receipts directly to the expense making it easier to manage them.
Do the rules change based on the type of business (sole proprietor vs. corporation)?
Single member LLC’s, partnerships, sole proprietors, and self-employed – Owners can choose to use either the actual expense method or the standard mileage rate method subject to the rules outlined above.
If an employee uses a personal vehicle for business,
- The employer typically reimburses the employee for the business mileage incurred at the standard mileage rate.
- The amount received for documented business miles is not taxable to the employee and vehicle expenses are deductible by the employer.
S Corporation/C Corporation – A vehicle used for business may be owned by the corporation or by an employee (even a shareholder employee). The method of claiming the deduction will differ depending on the ownership of the vehicle.
Vehicle owned by employee – If the employee (or a shareholder employee) uses their personal vehicle for business on behalf of the corporation,
- Require employees to submit a request for reimbursement to the corporation.
- The corporation can then reimburse the employee based on the standard mileage rate.
- Vehicle expenses are deductible.
- The reimbursement is not reportable as taxable income to the employee.
Vehicle owned by the corporation – A corporation must determine the deduction for vehicles it owns based on actual operating expenses. Corporations must also track personal use of the vehicle.
Partnership/LLC – The rules are the same as an S Corporation, with one exception: A partner/member who has unreimbursed auto expenses as a requirement of the partnership/LLC agreement can typically claim the deduction on Schedule E of Form 1040 rather than on Schedule A.
Note: It’s generally simpler for a business to allow an employee (even a shareholder, partner, or member) to use their personal vehicle and submit an expense reimbursement request. This eliminates a substantial amount of record-keeping for the employer.
Talk to your tax professional
Because of the substantial tax implications I can’t possibly provide a blanket answer for every business owner. Not even for a single client without knowing the full scope of their tax situation, in some cases, both personal and professional. My statements here are based on my generalized interpretation of the tax code. What I can tell you for sure is KEEP GOOD RECORDS. The IRS likes to check up on this deduction so having a mileage log and your receipts handy can save you a lot of time and stress if they come looking.
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