Can I claim my car payment as a business expense?
As a business owner, you may be using the car for both business and personal use. To figure out the amount of deductible expense there are two primary methods that are permitted by the Internal Revenue Service (IRS). You can choose the method that is more favorable for your tax situation.
1.Standard mileage method: You prorate your business miles and multiply this by the allowable mileage rate. For 2017 tax year, it is $0.535 and for 2018 it is $0.545. There are several conditions to use the standard mileage rate, you must own or lease the car and few important guidelines:
a) You must not have claimed a depreciation other than straight-line depreciation in the previous year.
b) You must not have claimed 179 deductions on your car.
c) You must not be owning more than five or more cars as part of a fleet operation.
d) You must not have claimed a special depreciation allowance for the car.
e) You must not have claimed actual expenses after 1997 for a car you lease
f) You cannot be a rural mail carrier who received a ‘qualified reimbursement’
For a car, you own: You must choose standard mileage for the first year the car is available for business use. Subsequent years, you can use either standard mileage or actual expenses.
For a car you lease: Standard mileage rate should be used for the entire lease period including renewals if you choose standard miles
2. Actual expenses method: The actual business usage and cost of the car expenses can be calculated. This can be used as a deduction. The following are the major expense categories that you can claim on your tax returns.
a) Gas, Oil
b) Repairs, tires
c) Insurance
d) Registration Fees
e) Licenses
f) Depreciation: For cars placed in service after 1986, MACRS Modified Accelerated Cost Recovery System is a popular method.
g) Lease payments prorated based on business use.
Record keeping tips
- Use apps that track miles and automatically generate a report towards the end of the tax year.
- Keep copies of your actual expenses, gas & oil change receipts, receipts, and maintenance, car payments etc.
For employees
Few important points to consider :
- You cannot deduct business miles from your primary work location to your home.
- You can deduct business miles from your primary work location to a client location or outside of your primary location.
There are two primary plans :
- Accountable plan: Most employers reimburse you for expenses incurred on your job which is classified as an accountable plan. This reimbursement will not be included in your W2 and you are required to report your expenses for reimbursement by your employer.
- Non-Accountable plan: If your employer uses a nonaccountable plan to reimburse you for the expenses, this amount gets included in the W2. You are then required to file form 2106- Unreimbursed employee expenses and itemize your deductions in your Schedule A. The employee expenses are subject to 2% of the adjusted gross income limit.
Important resources
IRS Publication 510 -Business use of car has important information on tax implications.