The Ins and Outs of Business Expensing a Car, If you own your own business, one of the biggest tax breaks you can get is a car expense deduction. If you’re eligible to expense the vehicle, the IRS will allow you to deduct the full value of your car expenses each year without having to prove that they’re business-related expenses (unlike employees who have to account for every expense).
But in order to qualify, you need to follow some strict rules regarding how you must use and maintain your vehicle while it’s in service.
What is an Automobile?
An automobile is a self-propelled vehicle designed to transport people or goods. The term car is derived from the Latin word carrus, which means a wheeled vehicle. Automobiles are classified by how they are powered: gasoline, diesel, electric, or alternative fuel. In most countries, cars are the dominant form of transportation.
Businesses often use cars for business purposes, such as sales calls or business trips. When business expenses are related to the use of a car, it is important to know the rules and regulations regarding business expenses. The following is a step-by-step guide on how to business expense a car.
What Can You Claim as an Automobile Expense?
When it comes to business expenses, the IRS has very specific rules. In order to claim an automobile expense on your taxes, you must use the vehicle exclusively for business purposes. This means that you can’t use the car for personal errands or commuting to and from work.
You can, however, deduct a portion of the car’s expenses if you use it for both business and personal purposes. The IRS allows you to calculate your deduction using either the actual expenses method or the standard mileage rate method.
To figure out your deduction using the actual expenses method, you’ll need to keep track of all the money you spend on gas, oil changes, repairs, insurance, etc.
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What Cannot Be Claimed as an Automobile Expense?
In order to avoid an audit, it is important to know what can and cannot be claimed as an automobile expense. The following are some examples of common expenses that cannot be claimed:
- Personal use – If you use your car for both business and personal purposes, you can only claim the percentage of expenses that relate to business use.
- Commuting – You cannot claim the cost of commuting to and from your place of work.
- Travel outside Canada – You can only claim expenses related to travel within Canada.
- Meals and entertainment – You can only claim 50% of eligible meal and entertainment expenses.
How Do I File for My Automobile Expenses?
You can claim the Standard Mileage Rate or Actual Expenses, whichever is greater. The Standard Mileage Rate for 2019 is 58 cents per mile. You can begin claiming the Standard Mileage Rate on the first day you use your car for business purposes.
If you choose to claim Actual Expenses, you will need to keep track of all expenses related to your car, including gas, oil changes, repairs, insurance, etc. You will then deduct these expenses from your taxes. Keep in mind that you can only claim one or the other- you cannot mix and match.
How Do I Know If I Can Claim My Vehicle as an Automobile Expense?
Depending on how you use your vehicle, the answer may vary. If you use it exclusively for business, then you can claim the entire cost as a business expense.
However, if you use it for both business and personal purposes, then you can only claim the percentage of time that you use it for business.
For example, if you use your car 60% for business and 40% for personal, then you can claim 60% of the total cost as a business expense.
Why Should I Keep Records on My Auto Usage?
You should keep records of your auto usage for a few reasons: to make sure you’re getting the most deductions possible, to have a clear picture of your business expenses, and to be prepared in case you’re ever audited. Here’s a step-by-step guide to keeping track of your auto expenses.
What If I Use More Than One Vehicle for Work Purposes?
You can only deduct the business-use percentage of your total vehicle expenses. So, if you use your car 50% for business and 50% for personal reasons, you can only deduct 50% of your total vehicle expenses.
The same rule applies if you have more than one vehicle. You can only deduct the business-use percentage for each individual vehicle.
Where Can I Get More Information About Automobile Expenses?
You can get more information about automobile expenses from the Internal Revenue Service (IRS). The IRS website has a page devoted to business expenses, which includes information on what types of expenses are deductible.
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