Writing Off Your Vehicle for Business
Tax season is not exactly the most welcome time of year for most people, especially those with businesses to run. And one of the more pressing demands is trying to determine how much of your annual vehicle usage can be successfully claimed as a business expense. Its a tough thing to track, easy to slack on, and when it comes time to put all the information together many are left with a sticky knot of rules to sort through that can sometimes feel like more trouble than the result is worth. Here's a basic rundown to keep things from getting to overwhelming.
Let's say you're an entrepreneur. Like any other taxpayer, you have the ability to potentially claim a deduction based on the amount your car or truck is used for business purposes. Alternatively, the value of your vehicle might be eligible for exclusion from your annual income. There are a couple of ways these deductions can be accomplished.
One of the more common methods people employ is what the IRS typically refers to as an accountable plan. Think of it as something resembling an expense account. Essentially your main focus is keeping track of every cost necessary for the vehicle while it is in use and then seeking reimbursement afterward. Some of these costs are fairly straightforward, things like parking, gasoline, car washes, and of course any maintenance or repair work done. Unfortunately, however, deductions are not permitted for work commutes.
You then regularly submit an expense report, with all of your vehicle-related costs outlined, for your employer to peruse. If everything appears ship shape, a full reimbursement will be provided. If you're on the other side of the desk, working as an entrepreneur, you are responsible for validating that the vehicular expenses of your employees were indeed for business related needs.
An alternate case would be in the issuing of a company owned car for use by an employee. The company vehicle is often used for not just business purposes but for personal use as well. This is why it is crucial on the part of the employee that personal expenses and business expenses are tracked separate of each other whenever the vehicle is in use. In other words, when the car is in use for business purposes it should not be tracked as income, but any personal use of the car should.
Let's put together a quick example for this second scenario. Say an employee is provided with a vehicle with an annual lease value of $40,000. If an employee is spending one-quarter of his or her driving time for personal errands, that same employee will have to claim $10,000 as noncash income. It's important to remember that income in this case is always based on the annual lease value of the car.
These are two relatively basic and fairly common methods to the same end. That being said, there are still a good number of variables which can fall into the picture and complicate things considerably. For instance, your employee is using a vehicle to ride to two different jobs. Or say an entrepreneur is taking care of some business ventures overseas, in Spain perhaps, and utilizes car hire Malaga airport to reach one job site, then uses the same hire for a second job site. Here tracking becomes slightly more complicated. But as a starting point, drivers typically find these two methods fairly straightforward and often effective in helping them hold onto a little extra coin at tax time.