Being a professional service provider, traveling is often necessary in providing services. As such, a decision has to be made on how to account for these expenses and deductions for tax purposes. In most instances, the auto is used in carrying out the business and personally. This duel use increases the documentation burden of the taxpayer. A couple of common options and considerations are discussed below.
Taxpayers who use a passenger automobile, including a “luxury” automobile, in the pursuit of business or in an income-producing activity can deduct certain costs related to its acquisition and maintenance, but must comply with strict record-keeping requirements. Deductible items include gas, oil, tolls, parking fees, insurance, and depreciation (if you own the car) or rent (if you lease the car). You can deduct actual expenses incurred as a result of the business use or you can use the standard mileage rate, discussed below. All the expenses must be allocated between business use and nondeductible personal use. Use of an automobile for commuting to and from work is personal and expenses related to commuting are nondeductible.
Instead of figuring actual expenses, you can use the standard mileage rate, which is adjusted each year for inflation. You may use the standard mileage rate to compute the deduction for up to four cars used simultaneously for business purposes. The rate is 54.5 cents per mile for travel during 2018. Note that even if you use the standard mileage deduction, you can still deduct parking fees, tolls, interest relating to the automobile’s purchase, and state and local taxes. The standard mileage deduction is in lieu of deducting operating and fixed costs of the automobile. Depreciation is a component of the standard mileage rate, and your basis in the automobile must be reduced by the depreciation allowed.
If you want to use the standard mileage rate for a car in any year, you must choose to use it in the first year you place the car in service in your business. After the first year, you can switch to deducting actual expenses.
Generally, the cost of an automobile is a capital expenditure; however, if you use the automobile more than 50% for business purposes, you can elect to expense and deduct a portion of the vehicle’s cost in the year it is placed in service. The remainder of the cost is then deducted over several years by taking depreciation deductions. There may be bonus depreciation and Section179 depreciation deductions available in the year in which the vehicle is placed in service. The amount allowable as a depreciation deduction for each year of the vehicles’ use is limited, and is determined based on the type of vehicle, the year in which it is placed in service, and the percentage of business use.
Vans and trucks are subject to a higher limitation than passenger automobiles.
A variety of factors should be considered when determining how to account for the business use of a vehicle. If you would like to discuss the specifics of your individual situation, please reach out to us.