Vehicle (Light) Expenses and Tax Deductions

Depreciation is a crucial part of tax planning for businesses.The tax code limits depreciation deductions for passenger automobiles, such as cars, light trucks, and light vans 6,000 GVWR and under. Such vehicles are subject to special depreciation limits, also known as “luxury auto depreciation rules.”

The maximum auto depreciation deductions for new and used passenger autos placed in service in 2024 are:

• Year 1: $20,400

• Year 2: $19,800

• Year 3: $11,900

• Year 4 and thereafter: $7,160

These allowances assume 100% business use and that bonus depreciation is taken.

These limits are adjusted annually for inflation.

Methods to Calculate Depreciation Expense

There are two primary methods for calculating vehicle expenses for tax deduction purposes: the Standard Mileage Rate and the Actual Expense Method

1. Standard Mileage Rate:

   • The IRS sets a standard mileage rate each year, which represents the deductible amount per mile driven for business purposes. For 2024, the rate is 67 cents per mile. This method is straightforward and requires minimal record-keeping. Simply multiply the total business miles driven by the standard rate to determine the deductible amount.

   • To use this method, you must keep a detailed log of business miles driven. This log should include the date, destination, purpose of the trip, and the number of miles traveled.

2. Actual Expense Method:

   • This method allows you to deduct the actual costs incurred for operating the vehicle. These expenses include fuel, oil, maintenance, repairs, tires, insurance, registration fees, and depreciation.

   • To use this method, meticulous record-keeping is essential. You must track all vehicle-related expenses and differentiate between business and personal use. Only the portion of expenses attributable to business use is deductible.

   • If your vehicles is used for business purposes 50% or less straight line depreciation must be used.

   • If your vehicle is used for business more than 50% the Modified Accelerated Cost Recovery System (MACRS) is the only depreciation method that can be used to depreciate any car placed in service after 1986. However, if you used the standard mileage rate in the year you place the car in service and change to the actual expense method in a later year and before your car is fully depreciated, you must use straight-line depreciation over the estimated remaining useful life of the car.

   • Depreciation can be particularly beneficial under the actual expense method. The IRS provides specific guidelines and limits on how much can be depreciated each year, as mentioned above. Bonus depreciation and Section 179 expensing can also be advantageous for new vehicle and used vehicle (but new to you) purchases.

Choosing the Right Method

The best method for your business depends on several factors, including the amount of business use, the cost of operating the vehicle, and the level of record-keeping you're willing to maintain.

• Standard Mileage Rate is generally more beneficial for vehicles that have lower operating costs and are used more for business than personal reasons.

• Actual Expense Method might be more advantageous if your vehicle has high operating costs or if you purchased a new vehicle and want to take advantage of depreciation.

Mixed-Use Vehicles

If you use a vehicle for both business and personal purposes, you can only deduct the expenses related to the business use. Accurate records of both business and personal miles are crucial. The IRS requires that you keep a log of business miles to substantiate your deductions, otherwise the IRS can disallow the deduction.

Special Rules for Certain Vehicles

Certain types of vehicles have different rules. For example, if you use a vehicle that is not typically used for personal purposes (e.g., delivery trucks, taxis, and hearses), you may be able to deduct a larger portion of the vehicle's expenses. Additionally, if you use a heavy vehicle (weighing more than 6,000 pounds), different depreciation rules and limits apply, potentially allowing for greater deductions. We will explain the tax rules around depreciation for heavy vehicles in the next article.

Leased Vehicles

Leased vehicles have their own set of rules. You can either use the standard mileage rate or deduct the actual lease payments and other expenses. The choice between these methods follows similar guidelines to those for owned vehicles.

Documentation and Compliance

Regardless of the method chosen, proper documentation is key. Maintain records of all expenses, mileage logs, and receipts. In the event of an IRS audit, these records will be necessary to substantiate your claims.

Consulting a Tax Professional

Navigating the complexities of vehicle deductions can be challenging. Consulting a tax professional can ensure that you maximize your deductions while staying compliant with IRS regulations. They can help you choose the most beneficial method and ensure that all documentation requirements are met.

In conclusion, business vehicle tax deductions can provide significant financial benefits. By understanding the rules and keeping accurate records, you can reduce your taxable income and improve your bottom line.