Your Car as a Business Expense

Insurance salespeople, architects, realtors, contractors,  and property managers; these are just a few of our clients that use their personal car to get from business point A to business point B.  As a business owner, if you use your personal car to drive anywhere needed to conduct business (to a meeting, client site, post office, office supply store, etc.) these miles are deductible to you as an expense.

So let’s cut to the chase. The whole process is made more complex by the fact that there are two ways to account for your car expense. Which one is better? Each situation is individual (of course!) so you will need to weigh each option. Or get a CPA to help you weigh each option. (Us?)

Mileage Method

The easiest way to arrive at auto expense is the mileage method. You document the business miles you drive and multiply it by the IRS provided rate. Done. That is your auto expense.

If you are a sole proprietorship, there is a tax form that will calculate it for you. If you are a partnership/LLC or corporation/S corporation, there is no ready-made form for mileage. Simply multiply your mileage by the rate and enter “Auto Expense” on the lines for other expenses. (And if we want to get really technical, that will be a journal entry in your books of debit to Auto Expense and credit to Shareholder Equity.)

Now the fine print:

1- Remember that commuting miles are not an expense. If you live in the suburbs, those miles in and out of town are your own.

2-If you choose mileage, you cannot expense actual costs such as gas, car payments, repairs. The mileage rate is set high enough that it should offset all of those.

Actual Method

Instead of taking mileage, you can expense all you actually paid out in relation to your car. This includes gas, oil, tolls and parking fees (both actually also expenses with mileage method), lease payments, insurance, garage rent, repairs, registration fees and licenses. It also includes depreciation on your car. Depreciation is far too big a subject to tackle here, but suffice it to say your business “owns” the car and expenses portions of the car’s cost over time instead of all at once. (See? It’s totally awesome to be an accountant!)

1-If you also use the car for personal use, you must divide your expenses between business and personal.

2-There are lots of rules involved with the actual method, including ones that may affect taxes owed in future years.  Proceed with caution.

For the complete and complicated instructions on car expenses, and for the hundreds of special scenarios you are wondering about, read more from the ultimate authority, the IRS, in IRS publication 463.