Deducting Vehicle Expenses On Your Income Taxes: Q&A
There are many rules and exceptions, but there are some things you can know for sure about claiming vehicle expenses.
As summer winds down, you’re probably thinking more about leisure-time activities than income taxes. But once Labor Day hits, time flies. Before you know it, you’re frantically trying to finish up all of your end-of-year financial tasks, like making charitable donations and buying anything you want to claim as a business expense on your 2024 taxes.
We always recommend getting a jump on income taxes by organizing your business expenses throughout the year, whether you do that on paper or by using an accounting or personal finance application. Either way, you should have a safe place to store your receipts, whether or not you’re sure you’ll be able to claim them.
We’re going to focus on vehicle expenses this month because the IRS has some very clear rules on whether they’re deductible, though there’s a lot of gray area. If after reading these questions and answers you’re still unclear on your own situation, let’s schedule some time to talk.
What does the IRS consider a “vehicle” to be?
A car, van, pickup, or panel truck
Who is eligible to claim the deduction?
The owner of the vehicle. You can also submit expenses on your tax return for a leased vehicle. Do you own more than five vehicles that you want to claim? This is considered a fleet, and it would have its own reporting rules.
You must either own or lease the vehicle for which you’ll claim expenses on your income taxes.
What if the vehicle is used for both business and personal purposes?
You’ll need to keep very good records if this is the case. Determine how many miles were driven for each and split the expenses between them.
How does the IRS define business use of a vehicle?
This is where you may run into gray areas. Here are some examples that the IRS has provided:
- Visiting customers
- Going to a business meeting away from your regular workplace
- Traveling between work locations within your “tax home” (the area where your business is located, not your home – unless you have a home office)
- Going from your home to a temporary workplace
Using your vehicle to provide rideshare services like Uber is, of course, deductible. Commuting from your home to your regular workplace is not.
What are legitimate business expenses for use of a vehicle?
The IRS defines them as, “ordinary and necessary.” Another gray area.
How do you calculate vehicle expenses?
There are two methods. The first is the standard mileage rate. In 2024, you would just deduct 67 cents per mile. You can’t use this method if, for example, you use the car for hire or you’re wanting to claim depreciation or trying to take a Section 179 deduction. The process for both is complicated, and we recommend you consult with us before attempting either.
The second involves calculating actual expenses. You’ll need to add up all of your vehicle costs. This is not an exhaustive list, but here are some examples the IRS gives:
- Lease payments
- Registration fees
- Gas
- Insurance
- Repairs
- Tires
- Tolls and parking fees
What kind of records do you need to keep?
The answer to that depends on the method you’re using. If you’re claiming the standard mileage rate, you should maintain documentation identifying you as the owner. You’ll also need a thorough daily log that shows miles traveled, destination, and business purpose.
For actual expenses, it’s still a good idea to keep a daily mileage log in case, for example, you’re also using the vehicle for personal purposes. You must also keep all receipts, invoices, and other documentation to prove that the vehicle is yours and you spent money on its upkeep.
TIP: If you’re thinking about depreciating the vehicle, you’ll need to show the original cost of the vehicle, written evidence of any improvements, and the date it was placed in service.
Where do you report vehicle expenses on your income tax return?
You’ll report business-related vehicle expenses on the IRS Schedule C.
Sole proprietors must complete a Schedule C in addition to a Form 1040. On the 2023 Schedule C, car and truck expenses went on Line 9. If you’re not depreciating, you’ll also need to enter your vehicle information in Part IV of the Schedule C. You’ll fill out Form 4562 if you are depreciating and carry that number over to Line 13 of the Schedule C.
Sound like a lot of calculating and organizing and saving paper? It is. But it’s necessary in order to be able to claim a deduction for what might end up being some pretty major expenses, depending on your profession and work mobility. As we said, there’s a lot of gray area in this tax topic. We can advise you if you’re struggling with some of the concepts we discussed here – or with anything else related to your 2024 income taxes.
