As a self-employed business owner, you know how important it is to track and manage your expenses. From supplies to services and travel, there are many items that can be written off – including the use of your personal car!
If you’re considering writing off your car as a business expense but aren’t sure where to start, keep reading. We’ll walk through the steps involved in taking advantage of the tax write-off. Plus, we’ll explain what sorts of costs may qualify, so that you’ve got all the information you need to make an informed decision about whether or not this strategy makes sense for your particular situation.
Who can write off their car as a business expense?
Generally, if you’re self-employed and use your car for business purposes—like visiting clients or running errands for your company—then you may be eligible to write off your business mileage or a portion of the costs associated with your car. This is also known as the business mileage deduction.
The key is that you must keep track of all your mileage and expenses (if applicable) and be able to prove how the car was used for business.
What counts as business mileage?
Business mileage includes all trips related to your business—whether you’re running an errand for the office, meeting a client, driving to a networking event, or taking yourself to the airport for work travel, if it ties back to your business it’s generally considered business mileage.
You can’t deduct mileage for the personal use of your vehicle. Things like going to a doctor’s appointment, picking up the kids from school and running errands for yourself don’t qualify as business mileage.
Also, you can’t deduct mileage for commuting between your home and your regular place of business. If you drive to an office every day to conduct your self-employed activities, the commute to and from your home won’t count as business mileage. But, you can deduct mileage for travel to a temporary work location, such as a job site or client’s office.
How to write off your car
There are two ways that self-employed people can write off their car on their taxes.
Standard Mileage Rate
The IRS sets a standard mileage rate for each tax year, which can be used to calculate the deduction. For the 2023 tax year, the standard mileage rate is 65.5 cents per mile. To calculate your deduction, multiply your business miles by the standard mileage rate.
For example, if you drove 1,000 mileage for business, it would look like this.
1,000 x $0.655 = $655
Your deduction is $655.
Alternatively, you can deduct the actual expenses related to your vehicle use, such as gas, oil, repairs, and maintenance. To use the actual expense method, you must keep detailed records of all vehicle expenses and the miles you drive personally and for business.
You’ll then deduct the business percentage of your total car expenses. Let’s say you drive 5,000 miles total in a year and 2,500 are for business. The first step is to determine the percentage of miles driven for business.
2,500/ 5,000 =0.50
You used your car 50% for business.
Next, you’ll determine how much of your total car expenses are deductible. You’ll do this by multiplying your total car expenses (including gas, insurance, repairs, etc.) by the percentage of miles driven for business.
For example, if your total car expenses for the year were $4,000:
$4,000 x .50 = $2,000
The actual expense method can be more complex than the standard mileage rate and requires more paperwork, so it’s important to do your due diligence before deciding which option is best for you.
Deductible car expenses
You can only write off expenses related to your car if you’re using the actual expense method. If you’re writing off your mileage via the standard mileage rate, you won’t be able to deduct expenses related to your car.
Common deductible car expenses include:
- Gas and oil
- Repairs and maintenance
- Registration fees
- Lease payments
- Depreciation (if applicable)
What about your car payments? Those are not deductible expenses. Instead each year you’ll write off the deductible depreciation.
Remember, you’ll need to keep good records of both your car expenses and your mileage to claim this deduction.
How to track your mileage
To take advantage of either method of writing off your car, you’ll need to track your business-related travel with a mileage log. This should include all the details of your trips such as date, destination, the purpose of the trip, and total miles driven.
There are several ways to keep track of your mileage. You can use a simple spreadsheet or a mileage-tracking app. Popular accounting software, like Xero, comes with an app that has built-in mileage tracking. Or you can use a stand-alone mileage tracking app like Mile IQ or Everlance.
How writing off a car works on your taxes
When you write off a car on your taxes, the amount you deduct will be applied to reduce your taxable income. This can have a significant effect on how much you owe in taxes or how much of a refund you receive.
For example, if your total taxable income is $50,000 and you deduct $1,000 for car expenses, your taxable income would be reduced to $49,000. This could mean a smaller tax bill or a larger refund when you file.
When you file your taxes, you’ll report your car expenses or business mileage on Schedule C of your personal tax return (Form 1040).
Business Mileage Deduction FAQ
What’s the standard mileage rate?
The standard mileage rate is a set amount per mile that you can use to calculate your car expenses deduction. It’s updated every year by the IRS and for 2023 it’s 65.5 cents per mile.
Can an LLC write off a car purchase?
Yes, an LLC can write off a car purchase as long as it is used for business purposes. The exact amount of the deduction will depend on whether you use the standard mileage rate or the actual expense method. We would not recommend doing this unless this vehicle is only used for strictly business purposes and you can document that it is only used for business purposes.
Can you write off a leased car?
Yes, you can write off a leased car if it’s used for business purposes. You can deduct the lease payments as well as other related expenses such as insurance and repairs.
Can you write off interest on a car loan?
Yes, you can write off the interest on a car loan if it’s used for business purposes. You’ll need to use the actual expense method to deduct this expense and you can only write off the business use portion of the interest. Also, keep in mind that your principal payments aren’t deductible.
Can I deduct mileage for driving to and from business meals or entertainment?
Yes, travel to business meals and entertainment are considered deductible business expenses. However, you must make sure that they meet the requirements of being “ordinary and necessary” to your business in order for them to qualify as a deduction.
Can I deduct mileage for driving between multiple job sites?
Yes, you can deduct mileage for driving between multiple job sites as long as they are related to your work. You’ll need to keep track of the distance and purpose of each trip.
Can I deduct mileage for driving to a temporary work location?
Yes, you can deduct mileage for driving to a temporary work location as long as it is related to your work.
Can I deduct mileage for driving to a business conference or trade show?
Yes, you can deduct mileage for driving to a business conference or trade show as long as it is related to your work.
Writing off a car on your taxes can help reduce your overall tax burden and get you back some money. Whether you choose the standard mileage rate or actual expenses method, it’s important to keep accurate records of any business-related travel and deduct your car expenses correctly when filing your taxes.
With the right information and guidance, you can confidently write off a car on your taxes and get back some of the money you’ve spent on business travel.