Thursday, August 5, 2021
USING YOUR CAR FOR BUSINESS
Do you use your car for business? Here are some things you should know.
(1) Thanks to the GOP Tax Act, for tax years 2018 through 2025 employees can no longer deduct employee business expenses if they itemize on Schedule A. This includes business use of your personal automobile. Only self-employed individuals are allowed to deduct the cost of using their car for business travel.
(2) If you use your car for business you must keep “contemporaneous” records of your business mileage. This means that you should record the information on the day the trip occurs. Record each individual business trip separately. Enter the date, location, business purpose and miles driven for each trip in some kind of diary, account book, or expense log. If you do not have EZ Pass you should also note any toll expenses. If you do have EZ Pass, you can identify tolls for business trips on the monthly statement. I also enter in my travel log the quarter I put in the parking meter while visiting a client or vendor or attending CPE activities.
In addition to the business miles driven for the year you will also need to know the total of all miles driven for the year. You should start off the year by entering the total miles on your car on the morning of January 1st in your log – and end the year by entering the speedometer reading after your last trip on December 31st. If you sell the car during the year, enter the total miles on the date of sale and enter the beginning mileage on your new car on the day you drive it off the lot.
And you should keep a contemporaneous car maintenance log to record all related expenses for the year – gas, oil changes, tune-ups, repairs, car washes, etc. The reason is explained in item #3.
(3) You have two options for deducting business use of your car. The simplest way is by using the Standard Mileage Allowance rate. You multiply the number of business miles driven for the year by this rate. The rate is set annually by the Internal Revenue Service, based on the variable costs as determined by a study conducted by Runzheimer International.
This standard mileage allowance rate applies no matter where in the United States you drive, and no matter what type, model or make of car you drive. It is available for a car you own or a car that you lease. It covers all the normal expenses of operating a car, including depreciation, but does not include auto loan interest or state and local personal property taxes. As a self-employed taxpayer you can deduct the business share of auto loan interest and any related state and/or local personal property tax paid on the auto on Schedule C in addition to the standard mileage allowance.
You can also choose to instead claim the business use percentage of the total cost of maintaining your car, which includes –
• auto club membership
• license and registration
• lease payments
• repair and maintenance
• wash and wax
If you drove a total of 20,000 miles for the year and you have logged 15,000 miles for business purposes you can deduct 75% of these expenses. There are special limitations on the deduction for depreciation.
It is a good idea to keep a car maintenance log to record all related expenses for the year – gas, oil changes, tune-ups, repairs, car washes, etc. – so you will have the information available to make an informed decision on what method to use. This is especially important for a new car, or for the first year you are deducting business use of a car.
Obviously, you want to use the method that gives you the greatest tax deductions over the life of the vehicle.
Generally, in order to claim the standard mileage allowance, you must elect to do so in the first year the car is “placed in service” (the year you purchase the car or the first year you use the car for business). If you claim the standard mileage allowance in the first year you can switch to actual expenses in a later year. But if you claim actual expenses in the first year you may not be able to use the standard mileage allowance in later years.
If you choose to claim the standard mileage allowance on a leased car in the first year of the lease you must use it for the entire period of the lease.
The above was taken from my book “AN INTRODUCTION TO SELF-EMPLOYMENT: THE BASICS OF SCHEDULE c”. If you are planning to start a small business, become a self-employed consultant or engage in any kind of “side hustle” this is a must read. For more information go here.