One of the most common tax deductions I see missed on a regular basis is the tax deduction for the business use of a personal vehicle.
When I meet with new clients and discuss this deduction, I hear all sorts of reasons as to why they haven't taken this deduction:
– They didn't know they could
– They don't use their personal vehicle that much for business
– They were told that since it was a personal vehicle, it couldn't be deducted
– They thought it was a red flag for an audit
The truth is, anytime your business uses your personal vehicle, there's a tax deduction, whether the business use is 1% or 100%.
Have Your Business Reimburse You for the Use of Your Personal Vehicle
Your business should reimburse you for allowing it to use your car – even if you are the one using it in the business.
When your business reimburses you, your business claims the reimbursement as a deduction, reducing the amount of business income that is taxable, which in turn reduces your overall taxes.
The tax savings get even better – the reimbursement you receive from your business is not taxable to you – it is tax free income.
What You Need to Do
To make this tax reduction strategy work, you'll want to track how many business miles versus total miles you put on your car in a year. Your business miles divided by your total miles is your percentage of business use. This is a very important percentage because it is the percentage of your vehicle expenses for which you can be reimbursed by your business.
Vehicle expenses include:
– Replacement parts
– New tires
– Car loan interest
– Lease payments
These expenses add up, which can mean big tax savings.
Multiply your total expenses by your percentage of business use and that is the amount of reimbursement to collect from your business.
Alternatively, you can have your business reimburse you based on the standard mileage rate. The standard business mileage rate is 55.5 cents per mile. This rate changes on a regular basis and can be found on the IRS website.
The standard mileage rate is used in lieu of other expenses. This means if you use the standard mileage rate, it is in lieu of your actual vehicle expenses for that year which include the expenses listed above.
Using the standard mileage rate method usually works best when your business mileage is high. If your business mileage is low, then using the actual costs will likely result in a greater deduction.
Regardless of which method you use, submit an expense reimbursement report to your business and have your business cut you a check. This is something you can do monthly or quarterly.
Create Your Permanent Tax Savings
The vehicle deduction is one of my favorite tax deductions because it has the ability to turn expenses you already have into legal tax deductions. This creates permanent tax savings.