Car and truck expenses can be confusing on your tax return. What are considered eligible expenses? And what are the current limits and mileage rates?
- An individual who owns a business or is self-employed can deduct vehicle expenses
- Automobile costs based on mileage or actual expenses are eligible
- Mileage rates have changed between 2020 and 2021
- Depreciation limits vary based on when the vehicle was purchased and put in service
- Certain vehicles used at least 50% for business qualify for the Section 179 deduction
When you run your own business, ensuring you are claiming all applicable credits and deductions will lower your tax burden. And you can deduct qualifying business vehicle expenses, like gas and repair costs, when you use a car for your business. But there are specific eligibility requirements for these deductions, and not all employees who use their vehicle for work will be able to claim them.
So, what are the eligible car and truck expenses? What does the process look like for claiming them? Here’s an overview of how to leverage vehicle expenses to drive down your taxes:
Who can deduct vehicle expenses?
To be eligible for vehicle expense deductions, an individual must own a business or be self-employed. This means that a regular W-2 employee cannot deduct car expenses on their tax return, even if they use it to travel to and from work every day. Some employers may reimburse costs if workers are required to use their vehicles for work, but employers are not required to do so.
If you are eligible, but you use the vehicle both for personal and business purposes, you need to split your expenses when doing your taxes. The deduction will be based on the percentage of mileage that you use solely for your business.
Next, let’s cover which expenses you can deduct.
What car and truck expenses are eligible?
It’s first important to note that there are two methods to calculate vehicle expenses:
- Standard mileage rate: If you choose this option, you must use this method in the first year you use the car and your business. And if you lease a vehicle, you must use it for the entire lease period.
- Actual expenses: Using this method requires you to figure out actual car expenses. The IRS includes the following as applicable expenses:
- Depreciation (limits discussed in a later section)
- Lease payments
- Gas and oil
- Repairs and tune-ups
- Registration fees
Now, let’s look at the current mileage rates for both 2020 and 2021 taxes, along with depreciation limits.
Mileage rates for 2020 and 2021
For 2020 tax returns, due in April 2021, the mileage rate is 57.5 cents per mile, and for 2021 tax returns, the rate is 56 cents per mile. If you decide to use the standard mileage rate option described above, these are the numbers you need to know when filing your taxes.
If you outline your actual car expenses, you need to know the depreciation limits for cars and trucks used for business.
For vehicles that are eligible for the bonus first-year bonus depreciation deduction that were purchased after September 27, 2017, and used for business during 2020, the depreciation limit is $18,100 for the first tax year, $16,100 for the second, $9,700 for the third, and $5,760 for each year thereafter.
If a vehicle was acquired before September 28, 2017, and placed in service after 2019, bonus depreciation is not allowed.
For vehicles first used in the business in 2020 but do not qualify for the first-year depreciation deduction, the limit is $10,100 for the first year, $16,100 for the second, $9,700 for the third, and $5,760 for each year thereafter.
The Section 179 deduction
Section 179 of the tax code provides guidelines for businesses to deduct certain necessary equipment. Qualifying work vehicles are generally only used for business purposes and include:
- Vans or vehicles that seat nine or more passengers behind the driver’s seat
- Classic cargo vans (vehicles that have an enclosed driver’s compartment or cargo area, have no seating behind the driver’s seat, and have no more than 30 inches of body in front of the windshield)
- Heavy construction equipment
- Some tractor trailers
For typical passenger vehicles that are used more than half of the time in qualified business use, the Section 179 deduction plus bonus depreciation has a limit of $11,160 for cars and $11,560 for trucks and vans.
Excluded from the limits are ambulances, hearses, taxis, transport vans, non-personal vehicles, heavy non-SUV vehicles, and trucks with at least six feet of interior cargo area, and others.
Some heavier vehicles, with a gross weight rating over 6,000 pounds but no more than 14,000 pounds, may qualify for $25,000 in deductions if the vehicle is acquired and placed in service before December 31.
Other Section 179 vehicle deduction notes:
- The vehicle’s title must be in the company name, not the company owner’s name.
- The vehicle must be financed with leases and loans that qualify.
- Depreciation limits are reduced by the percent of personal use if the vehicle is used for business less than 100% of the time, but it must be used for business at least 50% of the time.
- The Section 179 deduction can only be claimed in the tax year that the vehicle is placed in service.
These tax laws can get complicated fast. It’s always wise to work with a tax professional to get the help you need when preparing your tax returns and claiming expenses related to work vehicles.
Getting tax help for your business
When you’re unsure how to prepare your tax return or whether you qualify for business vehicle expense deductions, work with the team at Provident CPA & Business Advisors. We’ll make sure you’re claiming all credits and deductions for which you qualify. We also offer advice and guidance on other tax-minimization strategies and business planning for the future.
Contact Provident to get started with one of our tax professionals.