Running a small business is certainly full of ups and downs, but one thing’s for sure: costs add up quickly. A big expense for many business owners is their vehicle. However, these costs can be partially offset through tax deductions.

Here we’re sharing strategies for maximizing vehicle-related tax deductions and different ownership options you may have never considered before.

Understanding Vehicle Expenses

Before we get into the nitty-gritty of small business tax deductions, let’s go over what actually counts as a vehicle expense. These typically include fuel, insurance premiums, repairs and maintenance, and depreciation — basically, anything related to keeping your car on the road for business purposes. 

Maintaining detailed records is crucial for documenting your itemized deductions and backing up these claims during a tax audit. We’ll talk more about that later.

Who Qualifies for Vehicle Deductions?

It’s important to note that not all business owners are eligible for the same vehicle-related tax deductions. The structure of your business significantly impacts your options.

• Sole proprietors: As the business and the owner are considered one entity, sole proprietors can often claim vehicle expenses directly on their personal tax return. This includes itemized deductions for mileage, fuel, repairs, and insurance related to business use.

• S-Corp solopreneurs: While an S-corp provides liability protection, it’s often treated like a pass-through entity for tax purposes. This means the business income and expenses pass through to the owner’s personal tax return. S-corp owners should set up an accountability plan so that the company reimburses the owner for vehicle expenses. When approved and paid, the reimbursements are deducted from the S Corp as they show up as a business expense on their profit and loss statement (P&L). 

• Small businesses with employees: It may be prudent for the business itself to own the vehicle, and expenses like lease payments, fuel, repairs, and insurance are then claimed as small business deductions on the P&L. What’s more, employees who use personal vehicles for business purposes might be eligible for reimbursements or deductions, depending on the company’s reimbursement policy. There are many ways to maximize this as well as some pitfalls (increasing costs of commercial insurance), so you’ll want to get consultation on this. It is almost certainly worth it. 

As with so many tax-related situations, specific rules and regulations can vary based on factors such as state laws, business structure, and income levels. If you aren’t sure what you qualify for, it’s always better to reach out to a pro for help.

Deducting Your Vehicle Expenses

Here’s where the fun begins (well…as fun as taxes can be). There are two ways to deduct vehicle expenses:

• Standard mileage rate: The IRS establishes an annual rate per mile driven for business purposes. It’s simple to calculate, but you can’t claim actual expenses in the same year. In 2024, the rate is 67 cents.
  • Generally older, reliable, and gas-efficient cars benefit from deducting mileage
• Actual expenses: This involves adding up all your car-related costs — gas, insurance, repairs, and depreciation. While more complex, it can potentially get you higher tax deductions.
  • The majority of cars, especially newer trucks, will benefit from deducting actual expenses — tires, maintenance, and gas add up! We suggest having a business credit card devoted to the car fleet. It can’t get any easier than that.

Deciding which method is best for you depends on your situation. If you drive a lot and have relatively low expenses, the standard mileage rate might be easier. But if you have a fancy car with high maintenance costs, actual expenses could be your best bet.

Vehicle Ownership Options

Now, let’s talk about whether you should own or lease your vehicle.

Company-owned car

• Depreciation: Buying a car for your business can offer tax benefits through depreciation. However, it’s a bigger investment.
• Section 179 and bonus deduction: In certain cases, businesses may qualify for immediate tax deductions on between 60 to 100% of the cost of the vehicle.
• Luxury car limitations: Tax benefits may be reduced for vehicles that exceed specific luxury car thresholds.

Leased vehicle

• Lease payments: Generally deductible as business expenses.
• Limited deductions: Small business deductions may be restricted compared to owning a vehicle.

As a business owner, it’s important to weigh the financial implications, tax benefits, and your specific needs when choosing between ownership and leasing. Each option has its pros and cons. The best choice depends on your specific business and financial situation.

A note on insurance

We wanted to mention again that it’s also important to investigate the impact of insurance when the company buys the vehicle. Now, the company can lease a personal car as well, which could make personal insurance policies O.K.

One thing to consider is that if you’re in an accident when traveling to a business site, your personal policy might deny the claim. But, if you are simply commuting to your office it’s almost certainly fine.

Maximizing Your Deductions

To get the most out of your vehicle expenses, consider these tips:

• Keep detailed records: This is crucial. Track your mileage, gas receipts, and any other car-related expenses so that you can site them as itemized deductions. This record-keeping can get overwhelming — schedule a call to talk to us about the details, as we know some great tips that have simplified this for our clients. 
• Separate business and personal use: Clearly define business and personal trips to avoid any pushback on your small business tax deductions.
• Vehicle selection: Consider the tax implications of vehicle type, cost, and fuel efficiency.
• Stay informed: Tax laws and regulations change. Stay updated on changes that may impact deductions. And remember, tax laws can be complex, so it’s always a good idea to consult with a tax professional for personalized advice.

By following these tips and understanding your options, you can make the most of your vehicle expenses, turn them into itemized deductions, and keep more money in your business’s pocket. 

Need more information? We’re here to help. Set up a consultation today.

Photo by Chris Liverani on Unsplash