How to Handle Vehicle Costs on Your Tax Return
Each Year the IRS determines standard mileage rates that taxpayers can use to deduct vehicle expenses incurred for work, for medical reasons, or in the service of a qualifying charity. The standard mileage is a simple way to calculate vehicle costs which may only be a very small portion of the cost of operating a personal vehicle that you occasionally use for non-personal reasons. However, taxpayers have the option of calculating actual costs and using this amount as a business expense instead of the standard mileage. The best choice may not be immediately obvious so in this article, we will list several possible automobile expenses that qualify to help you decide which method will result in a larger deduction.
Using the Standard Mileage
The standard rate takes into account a host of variables including average costs of insurance, gas and repairs across the country. So the standard rate may be lower or higher than your actual vehicle costs depending on where you live and how much you drive. In Michigan, the cost of insurance, gas and car repairs ranks among the highest in the country, so the standard rate may not be representative of true costs. However, if you ou only make a few trips a year, using the standard rate can save you some time in determining your expense.
Calculating Your Actuals
Here’s another good reason to keep tidy records of your expenses throughout the year. It makes gathering the information needed to calculate actual vehicle expenses much easier. You’ll need to have receipts for everything, so don’t wait for tax time to try to organize them. When you think about the operation of your car, there are quite a few categories of expenses that make up the total cost:
Gas or Electricity
Fuel for your car is an obvious expense and one that directly relates to how much you drive it. You will either need to determine what percentage of your fuel costs were used for business purposes or know the fuel efficiency of your car and have a record of your trips to be able to calculate this expense accurately.
Maintenance and Repairs
Anything that you do to the car to improve or maintain its function or appearance can fit into this category. Oil changes, replacing the brakes, tire repair or replacement, and car washes all typically apply.
Insurance
Insurance is a substantial cost of operating a car that you don’t want to leave out of the equation. This is especially true if you pay for add-ons to your personal car insurance, for example, if you are a rideshare driver, that cause your car insurance to be more expensive than it is for the average driver.
Registration and Fees
Many people forget that car ownership comes with a yearly cost of keeping the vehicle’s registration valid. In some states, you may be required to pay for emission testing before your car can be licensed, and these are all valid expenses.
Lease payments or Depreciation
Whether you lease or own the vehicle, you can deduct a portion of the lease payments, or claim a depreciation amount as part of your vehicle’s operating expenses.
How Much of Your Expenses Are for Business
If the expenses you claim are for a personal vehicle that you also use for work (other than driving between work and home), then you’ll also need to calculate the percentage of the total vehicle use that was related to work. Once you’ve determined that percentage—let’s say you use the car for business 25% of the time—then the amount of your vehicle deduction cannot be more than 25% of your total vehicle expenses.
Everyone’s situation is unique so the method of using the Standard Mileage may not always be the best option to maximize your vehicle expense. Take the time to calculate your actual costs as well and compare them. It may mean a much larger expense and less tax which is definitely worth the extra time. Get in touch with us for recommendations on vehicle expenses and other income tax assistance including tax preparation and filing. We are tax experts and the best insurance agency in Troy Michigan. Call us at (248) 362-1313 or fill in the form below and don’t forget to subscribe to our monthly newsletter.
