Company automobiles can be a popular choice for a variety of small and big businesses, and serve a variety of purposes. Some businesses may find themselves needing their vehicle to perform business actions, while others may find it more beneficial to purchase company cars for their employees rather than reimburse employee expenses from their personal vehicle. Whichever category you fall into, it’s important to know the tax requirements and benefits your business faces:
Two Major Methods
When it comes to writing off business expenses related to the vehicle, there are two methods for deductions:
- Standard Mileage method: The Standard Mileage method has the driver multiply the miles driven during the year, for the business only, by the IRS standard mileage rate. For 2020, that rate is 57.5 cents per mile.
- Actual Expenses method: More than just mileage, the Actual Expenses method is based on all the expenses you incur from your vehicle. This can include gas, maintenance expenses, registration fees, insurance, vehicle depreciation, even car washes. Whatever expenses you make toward the operation and upkeep of your vehicle related directly to your business will fall under this category.
So which is the best method for you? It depends on your vehicle and how frequently it will be used. If you find that your vehicle needs more maintenance to run smoothly, it may be wise to choose the Actual Expense method to see a return on that money spent. If your car has good gas mileage and has relatively easy upkeep, the Standard Mileage method would be best for you.
Every vehicle experiences depreciation throughout the course of time you use it. This depreciation is actually tax deductible, which can be valuable for small business owners. For those using the Standard Mileage Method, depreciation is already factored in. But for those using the Actual Expenses method, there is an allowance of up to $18,000 for vehicle depreciation.
There are additional rules for luxury vehicles. There are tighter limits on the amount of money that is deductible from a luxury vehicle purchase, assuming that the vehicle is used 100% for business purposes. Businesses can write of $10,000 for depreciation of a luxury vehicle, and a maximum bonus depreciation allowance of $8,000.
Need expert guidance?
To be able to write off expenses for your business vehicles, it’s crucial that you and your employees keep detailed and organized records of the expenses you put into the vehicle and the distances and purposes it is used for. For businesses looking for guidance with their finances and tax deductibles, Orcutt Financial can simplify the process for you. As a small business serving other small businesses in our community, we have the knowledge and the understanding to assist you with all of your payroll, bookkeeping, and tax advice needs. Your business finances don’t have to be stressful, partner with us today to get the help you need.