How to write off your automobile expenses for taxes is a big topic to the self-employed. To reduce the profit down in your business, there are two basic methods, and both of them require a logbook.
One is called the actual expense method, which is an IRS-approved method for claiming expenses related to the use of an automobile for business. These are expenses incurred while operating the vehicle and are used as a valid deduction on a tax return.
Examples of Actual Expenses
Some of the costs you can include in your Actual Expenses are:
- Lease payments
- Auto insurance
- Maintenance (such as oil changes, brake pad replacements, tire rotations)
- New tire purchases
- Title, licensing, and registration fees (not deductible in all states; check with TurboTax to see if this expense is deductible in your state)
- Vehicle depreciation (use a depreciation table to calculate the amount, and then deduct only the portion that applies to the business use of your vehicle)
A higher percentage of small business owners use the standard mileage method because it is easier to manage and provides a bigger deduction. All it requires is that you track the total mileage for the year.
Keeping a log of the odometer reading each day as you start using a vehicle for business and again when you are home is all it takes. Personal usage and commuting don’t count, so you can only track the number of miles actually driven for business, such as meeting a client, going to the bank, meeting with an accountant or lawyer on business matters.
This video provides more options for writing off your automobile expenses:
Leasing a Business Vehicle
The third alternative discussed in the video is leasing a business vehicle. A drawback when leasing and using the Actual Expense method is you aren’t able to depreciate a leased automobile.
You can deduct the business percentage of the lease payments, but not as much if it is considered a luxury car. However, the higher the cost, of an automobile, the more leasing becomes a better option.
There are several types of leasing options:
-Also sometimes referred to as a “walk-away” lease, a closed-end lease is the most common type of consumer lease.
-A closed-end lease is a popular option because monthly payments are usually low for consumers with a good credit history.
-Less common than a closed-end lease, an open-end lease is often used by businesses or individuals who travel frequently.
-A subvented lease is a special lease offered by the finance company associated with a particular manufacturer. These leases are often offered when automakers need to move inventory quickly, or for particular models in low demand. Though you may not always be able to find the particular model vehicle you’re looking for, if you qualify, subvented leases can save you a lot of money.
There are also single payment leases if you have plenty of cash, which gets rid of payments and interest, and option-to-buy leases where you can purchase the vehicle at the end of the lease.
The only way to write off the full cost of purchasing, maintaining, and repairing your car is if you use it exclusively for your business purposes. However, it only makes good business sense to deduct what you can.
When in doubt, talk to your San Antonio tax expert to find out which method would be optimal for your company.