July 2019
SMALL BUSINESS TIPS
Deducting the Business Use of Your Vehicle
If you operate a small business and you drive regularly for that business you have two choices: you can either drive your personal vehicle and reimburse yourself for the business portion of the associated costs, or you can transfer the vehicle to the business and pay all of the associated costs directly from the business. Which of these options you choose depends on the vehicle and how you use it within the business. There are no inherent tax benefits to titling your vehicle into your business, in fact doing so limits your options in how you deduct the cost of that vehicle. However, when your vehicle is 100% business use then titling it to your company can simplify your record-keeping requirements and allow you to pay for your vehicle costs directly out of your business account.
The first step to decide where you should place ownership of your vehicle is to determine which vehicle cost deduction method is more beneficial in your situation.
Standard Mileage Rate vs Actual Expenses
There are two primary methods for deducting the cost of using a vehicle for business purposes: The standard mileage rate method and the actual costs method.
Standard Mileage
With the standard mileage rate you can deduct a specific dollar amount for each business mile you drive during the year (for 2022 the standard rate is 58.5 cents per mile). The standard mileage rate is used more often since it only requires you to keep track of the miles you drive throughout the year and does not require records of any other expenses. However, the standard mileage rate can only be used for a vehicle that is in your personal name. If your vehicle is titled to your business, you are required to use the actual expense method..
Actual Expense
With the actual expense method you can deduct your out of pocket costs for fuel, insurance, repairs, etc. You can also deduct the cost of the vehicle by depreciating it over its asset life (typically 5 years). The actual expense method requires much more thorough record-keeping. You need to keep track of each vehicle related expense throughout the year, and if you use the vehicle for both personal and business use then you also need to keep track of the total business and total personal miles for the year
Choosing the Right Method
If your vehicle title is in the name of your business you are required to use the actual expense method. However, if the title is in your personal name you can choose which method to use in the first year. You can switch methods in the following years, but there are additional restrictions to do so. It is in your best interest to take the time in the first year to determine which method will be more beneficial.
The standard mileage rate method is intended to simplify record-keeping requirements while still providing for an accurate deduction for the cost of using your vehicle in your business. To that end, in many cases the standard mileage rate method should provide the same or greater tax benefits as the actual expense method. However, there are specific factors that can make the actual expense method more beneficial:
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Price of Car: Since you can deduct the cost of a car over several years with the actual expense method, a more expensive car increases the probability that the actual expense method will be more beneficial
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Fuel Efficiency: With the standard mileage rate you get the same deduction no matter how many miles you get per gallon, so a less efficient vehicle will eat away at a greater portion of your allowed deduction.
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Highway vs City: If you are driving primarily in a large city you are likely putting much fewer miles on your vehicle while still spending the same amount on car payments, insurance, etc.
If any of these factors apply to your situation then you may receive a greater benefit through the actual expense method. It is also worth noting that under the actual expense method you will receive a greater tax benefit in the first few years while you are depreciating the cost of the vehicle. Once the vehicle is fully depreciated your deduction will drop significantly. Under the standard mileage method your deduction will be relatively consistent subject only to small changes in the standard rate each year.
Summary
If 100% of the use of your vehicle is for your business and you have large vehicle costs either from buying a newer car or driving mostly in the city, putting your vehicle title into your business can simplify your record-keeping requirements without sacrificing the benefits of the standard mileage rate method. If you use your vehicle for both personal and business needs or you drive an older vehicle with a low market value, you may want to keep it in your personal name to preserve the option to use the standard mileage rate.