Cars play a crucial role for many small business owners, with many self-employed individuals using them for much more than a brief commute to the office. As a small business owner using your personal vehicle for work purposes, you may be eligible to write off your car as a business expense, at least in part. This can result in substantial tax savings that you don’t want to miss out on!
What Does it Mean to Write Off a Car for Business?
Writing off a car means calculating what portion of your personal vehicle is used for business purposes and claiming that amount as a tax deduction. Tax write-offs are a key way that small business owners save money on taxes annually as they take into account business expenses that are nontaxable (such as a car for business use).
The obvious example of using a personal vehicle for business purposes is ridesharing. Drivers for rideshare platforms like Uber and Lyft should be experts at properly writing off a portion of their car on their taxes, as their car is essential for their work! Other business uses for personal vehicles may include:
- Meeting with clients in-person
- Driving between various work sites
- Picking up supplies
When you write off a car as a business expense, the deduction amount will vary depending on the vehicle type, purchase price, and specific use for your business. There are also several additional aspects of a vehicle that may be deducted—such as mileage or insurance—but these are subject to which deduction method you choose.
How Do I Qualify to Write Off a Car for Business?
You qualify to write off vehicle expenses if you can check the following boxes:
1. You are self-employed.
If you are a small business owner who operates as a self-employed individual, you are eligible for this tax deduction.
2. You or your business own the car.
Be careful if your business owns the car! Using it for personal reasons in this case is a taxable fringe benefit.
3. Your business use is not just commuting.
Because commuting does not qualify as business use of a personal vehicle, you must be using the vehicle for business-specific transportation needs in order to claim it as a deduction.
If you don’t qualify to write off a car for your business, no worries! There are several other self-employed write-offs available to lower your owed taxes, such as the home office deduction.
How to Write Off a Car for Different Business Structures
Writing off a car works differently depending on your business structure. The main difference comes down to the first qualifier for writing off a personal car: whether or not you are registered as self-employed.
Sole Proprietor and LLC Vehicle Deduction
Sole proprietors and LLCs are the primary business types that should be taking advantage of the personal vehicle deduction! This is especially relevant if you are operating as a sole proprietor (without an LLC), as there is no legal distinction between you and your business, and you therefore cannot purchase a car as a business-only vehicle. Instead, you’ll need to consider it a personal vehicle and write off a portion of it on Schedule C tax form.
S-Corp Vehicle Deduction
S-Corp owners who classify themselves as employees cannot take advantage of a car tax write-off for a personal vehicle due to the Tax Cuts and Jobs Act, which makes W-4 employees ineligible for deducting business expenses. If this is your business structure, you must instead write a reimbursement check from the S Corp to the personal bank account when using a personal vehicle for work purposes.
What Vehicle Expenses are Deductible?
Now that you know whether or not you qualify to write off a car as a small business tax deduction, let’s get into the specifics of how to write it off!
There are two different methods you can use to claim a portion of your personal vehicle as a deduction on your tax return: the Standard Mileage method the Actual Expenses method.
Standard Mileage vs. Actual Expenses
The primary difference between the mileage method and the actual expenses method is in what car expenses you use to calculate your deduction. While the standard mileage method bases your deduction primarily on mileage plus a few other tax-deductible car expenses, the actual expenses method accounts for all car expenses except mileage, then takes a percentage of the total based on estimated business use.
Here is a quick breakdown of what each write-off method includes when calculating your deduction:
| Tax Deductible Car Expense | Standard Mileage Method | Actual Expense Method |
|---|---|---|
| Mileage | ✔ | |
| Parking | ✔ | ✔ |
| Car Washes | ✔ | ✔ |
| DMV Fees | ✔ | ✔ |
| Tolls | ✔ | ✔ |
| Gas | ✔ | |
| Insurance | ✔ | |
| Lease Payments | ✔ | |
| Maintenance | ✔ | |
| Vehicle Purchase Price | ✔ |
Determining which method is right for you depends largely on how you’re using your vehicle for work, so you may even want to calculate both to estimate which will yield the greater return. You also don’t have to use the same method every year! One year you may find using mileage to be more effective, whereas if you purchase a new car or have a lot of maintenance in a year, the actual expenses method may be preferable.
For the purposes of this article, we will be detailing how to calculate your tax write-off using the actual expense method.
How Do I Calculate Tax Write-Offs for My Vehicle?
Because the actual expense method involves a lot of transactions and expenses over the span of a year, you’ll want to keep a thorough record of your car expenses as part of your self-employment ledger. However, because you’re only able to write off a percentage of your total vehicle expenses based on business use, be careful not to mix all of your car expenses with your fully deductible business expenses. A great way to keep all of your expenses organized is with a write-off tracking tool.
To calculate your personal vehicle deduction using the actual expense method, follow these steps:
- Add up your total automotive expenses (see table for eligible expenses)
- Calculate your business-use percentage based on mileage
- Divide your total vehicle expenses by the business-use percentage to get your total vehicle deduction amount
Yes, mileage is still a factor with the actual expense deduction method. However, it is less complex and need not be an exact measurement. This part of your deduction calculation is more of an estimate as you come up with the percentage of time you used your personal car for business purposes. You do not need to keep a line-by-line mileage log to calculate the business-use percentage, however, if you’re nervous about claiming too much then err on the side of a lower percentage.
Looking for a formula to make calculating this all a bit easier? We’ve got you covered! Input your information into this formula to churn out your car write-off amount:
Total Vehicle Expenses x (Business-Use Mileage / Total Mileage) = Deduction
If you don’t have an exact figure for your mileage, remember that although it’s preferable, it isn’t essential and need not be kept in a written record. The mileage is simply a helpful figure for estimating your business-use percentage.
Example: Self-employed Handyman
After dropping off his kids at school, this self-employed handyman spends his day driving between his workshop and various customer homes where he makes a variety of different repairs. He also makes frequent trips to the hardware store to purchase tools and other equipment he then uses to make necessary repairs for customers.
Because his vehicle is such an integral part of his business, approximately half of the miles he drives are for business purposes. He also recently had to purchase new tires and is still paying off the loan on his car, which made his total vehicle expenses for the year around $10,000.
Dividing his total expenses by 50% for business use, this self-employed individual can claim $5,000 for his personal vehicle deduction.
Drive Your Way Into Tax Savings
It feels great to see those tax savings roll in as the deductions add up, doesn’t it? Deducting your car expenses is a fantastic way to lower your taxes, plus it’s only fair that you don’t need to eat the cost of using a personal car for your business when doing so naturally depreciates your car’s value. Now that you know how to calculate your personal vehicle deduction, you’re one step closer to getting your finances organized for tax season.
