If you use your car 100% of the time for business, you can deduct all the costs related to operating the vehicle, subject to limits. However, if you use your car for personal and business, you can only deduct the cost related to the business use of the vehicle.
There are generally two methods to determine your deductible car expense, the standard mileage rate method or the actual expense method.
Standard mileage rate
You get a deduction equal to the business standard mileage rate times the number of business miles traveled. For 2018, the standard mileage rate is 54.5¢ per mile (the 2019 rate is 58¢ per mile). This method estimates the actual cost to operate the vehicle. In order to use the standard mileage rate, you must own or lease the car and:
- Not operate five or more cars at the same time, i.e. fleet operations,
- Not claim depreciation for the car using any method other than straight-line if you switched to actual method. Depreciation is not allowed when using the standard mileage,
- Not claim Section 179 deduction on the car,
- Not claim bonus depreciation on the car,
- Not claim the actual expense for a car you lease, and
- Cannot be a United States Postal Service employee who received a “qualified reimbursement.”
If you are leasing the car, once you choose the standard mileage rate method, you have to use it the entire lease period (including renewals).
Actual expenses
This method calculates the actual cost to operate the vehicle, using a business use percentage times the actual expenses. Actual expenses are all expenses to operate the vehicle, including but not limited to: gas, oil, repairs, tires, insurance, registration fees, licenses and depreciation to compute the deduction. Multiply the total actual expenses by your business use percentage. To determine the business use percentage, divide the annual business miles by the total annual miles.
Under both methods, parking fees and tolls attributable to use of a vehicle for business purposes may be deducted as separate items.
In order to use the standard mileage rate, you must choose to use the standard mileage rate in the first year the vehicle is used in your business. After the first year, you can choose to use the standard mileage rate or actual expenses, whichever one gives you a greater deduction. However, once you switch to actual expense, you must continue to use actual.
If you start out using the actual expense method, you cannot switch to the standard mileage rate method.
Recordkeeping
You are required by law to substantiate your expenses by adequate records. This includes a mileage log with a record of the time, place, business purpose and number of miles traveled.
Employees
Accountable plan – An accountable plan is where the employer requires the employee to account to them the business expenses for reimbursement and requires the employee to return any excess amounts advanced exceeding the substantiated expenses. Employee reimbursements under an accountable plan should not be included in wages and the expenses should not be deducted by the employee.
Nonaccountable plan – A reimbursement arrangement that does not satisfy the accountable plan requirement is a nonaccountable plan. If your employer uses a nonaccountable plan to reimburse for the business expenses, the reimbursements are includable in wages. An example of this is an auto allowance for a fixed amount.
Prior to the 2017 Tax Cuts and Jobs Act (TCJA), an employee may have been able to deduct the unreimbursed business expenses under a nonaccountable plan as a miscellaneous itemized deduction subject to the 2%-of-AGI (Adjusted Gross Income) floor. The TCJA suspended all miscellaneous itemized deductions for tax years beginning after 2017 and before 2026.
This article is intended for educational purposes only and is not a substitute for obtaining competent accounting, tax, legal, or financial advice from a certified public accountant, attorney, or other business advisors. You should not act upon any of the information in this article without first seeking qualified professional guidance from your business advisors on your specific circumstances. The information presented should not be construed as advice or guidance from BFBA.