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Can I Deduct My Car? Six Guidelines on Taking Mileage and Depreciation
Jann Kostecke • Mar 26, 2014
There are a lot of misunderstandings about deducting your car or truck expenses for business, so it’s important to understand how you do this properly without taking too much or too little as a deduction on your tax return. To this set of frequently asked questions, here are six guidelines on taking mileage and depreciation that you won’t want to miss.
- Can I buy a new vehicle for my business and save money on my taxes? Sure, if you have a valid business reason for needing a vehicle for your business. If you will be using the vehicle more than half the time for business purposes, such as going to see customers, picking up supplies for the business, traveling to locations to perform work, etc. those are valid business purposes. (Note: Fifty percent usage for business is required for taking the 179 deduction, which allows you to write the car off faster.) Commuting from your home to your work location is not a valid business purpose. Another test would be whether or not you would pay for a new vehicle if you had an employee doing the same work you are doing. Would you also think it necessary to buy your employee a new vehicle to perform their job duties? Still another question to ask is whether or not other similar businesses have company vehicles. If your business is different from others, then you may want to reconsider buying a vehicle for the business.
- If I have a wrap or a magnetic sign on the side of my vehicle advertising my business, that’s a valid business purpose, right? Wrong! The IRS relies on what you are using the vehicle for in your business, not how the vehicle looks, when determining business usage.
- Which is better, taking actual car expenses or taking the standard mileage deduction? This depends on the situation. If you have a valid business need for a car to be purchased by the business, and you are expecting a large, unusual profit in your business this year and are looking for a way to offset the gain, buying a new vehicle will allow you to take a large writeoff in one year which could really help your tax situation in that year. In 2013, the maximum deduction for a car is $11,160 and for a truck or van is $11,360. If you are not in need of a big deduction due to an unusually high profit, or you like to change vehicles over frequently, say every two years, you may not want to take advantage of special depreciation allowances because of depreciation recapture, which results in recognizing ordinary income on your sale or trade-in. The standard mileage deduction may be the best bet for most businesses who use vehicles for both business and personal reasons. Standard mileage is designed to reimburse the total cost of driving your vehicle, including gas, maintenance and depreciation. However, you can continue to take standard mileage even if your vehicle is past its useful life of 5 years. The disadvantage is that the standard mileage rate is not always enough to pay for your actual business usage if you have major repairs or gas prices jump up quickly.
- Do I really have to keep records of business use of my vehicle? Yes, you need to keep a mileage log showing odometer readings, where you went, business purpose for the trip, and personal and commuting mileage as well. It really is easier to do this as you go and provides a more credible record should you ever be audited. This mileage log is essential for claiming standard business mileage, but is also important for vehicles purchased by your business, particularly if they are not used 100 percent for business.
- I’m not an employee, I’m a contractor, so I can deduct all my mileage to work, right? Maybe. It depends on whether or not you have a home office that you use for doing some work, for clients, meeting clients at your home office, and/or taking care of the details of your business such as billing your clients. It also depends on how many clients you work with or at their establishment. The more your job as a contractor looks like an employee’s commute, i.e. you go to the same place every day and do most of your work there, the less likely these miles will be considered commuting miles. However, if you do not have a routine where you see your clients on a regular basis, you have other clients you see at random intervals, and you do some work at home, your miles look less like commuting miles which are not deductible. It’s good to go through this with your professional tax preparer or review IRS Publication 463, Travel, Entertainment, Gift and Car Expenses.
- I can deduct my mileage for attending to my vacation rental property, correct? Yes, in most cases. The concern would be what is the primary purpose of your trip, to attend to the property or to take a vacation? This is determined based on the amount of time spent attending to the rental property versus doing other things not related to the rental property. For example, if you spent two solid days cleaning and painting your property to get it ready for a new rental, and you went back home after 3 days, clearly that is mileage you can claim as a deduction against your rental income. If on the other hand you spent 20 minutes stopping in to talk with the property manager where your rental was located and the rest of your weekend camping and hiking, you probably can’t claim that mileage as a business expense. There are a lot of gray areas in between these two examples, so you may want to consult with your tax preparation professional on how to handle your situation.
The theme here is what would a reasonable person do and what really makes sense from a business standpoint? Consider this before you assume you can deduct a vehicle or your mileage for business and ask a professional tax preparer what they think if you have more questions.
Happy tax season! I know that many people are not enthusiastic in a positive way about tax season. Reasons vary, but usually it comes down to a couple of things: 1) you can’t find the information and forms you need and spend lots of time you don’t have to track them down, or 2) you’re afraid of how much money you may owe and you don’t want to confront it. How do you overcome this tendency to put off filing your taxes? Here are some recommendations: 1) Set up a file to collect all the documents you will need to prepare your taxes. This file is where all your W-2s, 1099s, charitable donations, health insurance 1095s, etc. will be stored. 2) Look through your mail every day from January through April 15th for envelopes marked “Important Tax Information” or something similar. Save all of those envelopes, as well as any thank-you letters you receive from charitable organizations, mileage records, home sale/purchase documents, etc. Put these into your tax file. (Continue to review your mail after April 15th, just in case!) 3) Much of your tax information comes to you electronically now, so be sure to scan your email for notifications from your pension provider, investment firm, or bank that tax documents are ready on-line. Go on-line and retrieve your tax documents as soon as possible and put them in your tax folder. If you have any trouble signing in or finding your information, it’s a lot easier to get help with this now than it will be the second week of April. 4) Make sure your business mileage documentation is complete. Your mileage log should include details of business mileage, including date, purpose of each trip, who you visited (if applicable), miles, and your odometer readings. If you use more than one vehicle for business, you should keep a mileage log for each vehicle. Fill in any blanks in your mileage log(s) now. It will be easier now than later. 5) It’s easy to summarize your business deductions if you have a dedicated business credit card and business bank account. Then, you can download a listing of all of your transactions for the year that is easy to summarize versus searching for receipts and transactions in your personal accounts. Remember that you also need to keep your receipts to support credit card charges and checks written for business expenses. 6) If you go to a professional tax preparer like me, you may receive an organizer. The organizer has a lot of questions and it includes information from last year that will help you understand what you need to bring to your tax appointment. Please fill out your organizer! It will save all of us some time. 7) If you are afraid of how much tax you owe this year, the worst thing you can do is put off finding out how much it will be. Get your tax return done early, even if you don’t want to pay until April 15th. The earlier you understand how much you owe, the better you can plan to pay it, and the sooner we can plan for a better 2021 tax season.
Since the federal Tax Cuts and Jobs Act went into effect in 2018, many people stopped keeping track of their deductions. The TCJA doubled the federal standard deduction while limiting or eliminating the deductions for state and local taxes and miscellaneous expenses. Taxpayers often were better off taking the standard deduction, because their itemized deductions were lower. That is true for many taxpayers if you only consider their federal income taxes, but how about Wisconsin income taxes? Wisconsin did not change how income taxes are calculated with the new federal laws. Wisconsin has a standard deduction that decreases as Wisconsin income increases. You completely phase out of the Wisconsin standard deduction at $124,279 in income if you are married, and at $105,500 if you are single or head-of-household. If you are partially or fully phased out of the Wisconsin standard deduction, you can benefit from the Wisconsin itemized deduction credit. This credit is 5% of the total of medical and dental expenses (except health insurance), mortgage interest, and charitable contributions, including noncash donations to Goodwill, etc. Most people have mortgage interest and contributions they can claim for this credit but not medical expenses, which have to be reduced by 7.5% of your income as they are on the federal return. If you pay for your own health insurance premiums or long-term care insurance premiums directly (not through an employer) you can deduct most or all of those costs on your Wisconsin return even if you can’t on your federal return. This includes Medicare premiums, COBRA payments, and dental insurance. The Wisconsin school tax credit can be claimed based on Wisconsin property taxes or rent and lowers your taxes up to $300. Don’t miss out on Wisconsin tax savings! Keep track of your deductions this year and make sure you get credit for them on your Wisconsin tax return.
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