GETTING THE MOST TAX BENEFITS FROM YOUR CAR!
If you registered your vehicle in the business name and you use it exclusively for business, all is straightforward: the business gets 100% tax deduction for the vehicle expenses . However, if the vehicle is in your personal name, the deductions are limited and conditional to you keeping records compliant with the Internal Revenue Service (IRS).
If you are self employed
Self employed individuals get the most generous and straightforward deduction when using their personal car: they have the choice between deducting actual costs or mileage. With the standard mileage rate, you get a 58 cents deduction for every business mile (tax year 2019). To comply with IRS regulations, you will need to keep a mileage log detailing the business miles driven with your personal vehicle.
The following trips will earn you business miles:
1. Travel between offices - travels from your office or work site to the second place of business.
2. Business-related travels - travels to the bank, office supply store or post office. These small trips add up quickly!
3. Business meals and entertainment - travels to meet with clients /vendors
4. Airport/travel - travels to and from the airport for a business trip
Commuting between your office and work are NOT business miles:
Generally, you cannot deduct miles to and from work. The first trip from your house and the last trip back to your home are non-deductible commute. However, if you have a qualifying home office, you can take a mileage deduction for any trips you make from your home office to another business location. You will need to comply with the Home office rule
To know more about the home office deduction – https://www.kbfinancials.biz/home-office-deduction.html
If you are a member in a multi member LLC (Partnership)
A partnership is an entity separate from its members – therefore as a general rule - only the partnership’s expenses are deductible, the member’s personal vehicle expenses are not deductible by the partnership.
An exception exists if the partnership has a reimbursement policy in place (partnership agreement). To deduct vehicle expenses under this exception, the partnership will need to include a specific provision in the partnership agreement stating that vehicle expenses incurred outside the partnership are reimbursable.
In you are a shareholder in an S & C Corporation
An S- or C- Corporation is a separate entity from its shareholder – and as a general rule - only the corporation’s expenses are deductible, the shareholder’s personal vehicle expenses are not deductible by the corporation.
An exception exists if the corporation has a reimbursement policy in place (Accountable reimbursement plan). To deduct vehicle expenses under this exception the corporation will need to set up a plan that meets the following conditions:
(1) the plan is in writing,
(2) the plan requires proof of the business expense to be submitted to the corporation within 60 days of the expense
(3) the expense receipt should have the date, dollar amount, and general business purpose clearly stated.
Without such plan, the IRS will deem the vehicle expenses to be wages and will apply payroll taxes to the amounts. With an Accountable reimbursement plan in place, the vehicle expenses will remain deductible for the corporation and tax free to the shareholder.
As always, the views contained in this article are not tax or legal advice and are not a substitute for consulting with a tax professional. Karine Bauer, EA is an Enrolled Agent licensed by the Treasury Department with unlimited rights to represent taxpayers before the Internal Revenue Service. She is an experienced tax professional with more than 20 years of international experience.
Updated - February 16th, 2019