Operating your vehicle is a considerable expense when you take into account your car payments, insurance, gas, maintenance and more. It can certainly make a significant dent in your monthly budget. The good news is that if you’re self-employed, you may be able to write off some of these expenses if you use your car for business purposes too.
As an independent contractor, you can write off expenses necessary for conducting business. These expenses include, but are not limited to, the costs of maintaining a home office, equipment such as your computer and cell phone, insurance, and car mileage.
There are exceptions on what you can write off on your taxes in regards to your car, so we’ll go over what you can and cannot deduct. You can write off your car mileage for trips listed below:
You cannot not deduct mileage for personal use of your car and regular daily commuting.
You’ll need to separate your deductible business mileage from your non-deductible mileage, so first calculate how many miles you drove for business purposes for the entire tax year. Then figure out what that is as a percentage of all the miles put on your vehicle. For example, if you put 15,000 miles on your car and 7,500 were for business purposes, then 50 percent of those miles are deductible. Then decide if you’ll use the Standard IRS Mileage Rate which is 58 cents for business purposes for the 2019 tax year, or deduct actual expenses. Actual expenses factored into vehicle tax write offs include interest on a car loan, registration fees, lease and rental payments, insurance, gas, repairs, regular maintenance, personal property taxes, and depreciation. Parking and tolls can be deducted in addition to using the Standard Mileage Rate.
Whether to use the standard mileage rate or actual expenses is dependent on which will provide you with the bigger tax break. Generally, the more economical the vehicle is to operate, the standard mileage rate will give you a higher deduction. On the other hand, if you have higher operating costs (gas, tolls, repairs, etc.), the actual expense method might be the better option.
If you purchase a car and you’re financing it, you cannot write off your car payments on your taxes, but you can write off the interest on the loan, which is part of the standard mileage rate. Or, you can claim the interest as part of your actual expenses.The same rule applies if you’re leasing your vehicle. You may deduct the business portion of your lease payments. For instance, if your monthly lease payment is $500 and you use your car 20 percent of the time for business, then $100 per month provides you with a total deduction of $1,200 for the tax year. If your car is considered to be a luxury car, then there’s an amount based on an IRS table that’s included in income.If there’s an upfront cost or down payment for your car lease, you may also deduct the appropriate portion of that. But, the deduction must be spread over the entire term of the lease.
Yes, you can deduct sales tax you paid on a new or used car purchase, as long as it’s an itemized deduction. Individual taxpayers who itemize their deductions can claim either state and local income taxes or state and local sales taxes, but not both. If you live in a state that imposes both income tax and sales tax, you’ll have to choose which to deduct. Total taxes, when combined with real estate taxes and personal property taxes, are limited to a $10,000 itemized deduction limit.
At Everlance we get asked this question a lot, can you write off car insurance? It depends. If you use the actual expense method, then yes, you can write off your car insurance, but only the business portion. If you’re using the standard mileage rate, insurance is already included under that, and cannot be deducted elsewhere.
To take advantage of a vehicle tax write off and be able to write off car expenses, you need to keep accurate records of all these costs, especially the mileage used for business purposes. This is why it's essential to use an automated mileage tracker, which not only records your mileage, but it also distinguishes between personal and business trips as you simply swipe left or right each time you get behind the wheel. Everlance is the best rated car mileage tracker app which securely stores all your car-related expenses, in addition to mileage. It allows you to take images of all your receipts for gas, parking, oil changes and more. You can also link your credit card or bank account to keep track of your car-related automated monthly payments.This way, it takes the guesswork out of what portion of your car was used exclusively for business purposes, and all the deductible expenses you’re entitled to claim. The more you deduct, the less your tax bill will be.As tax laws are constantly changing, be sure to stay on top of what car expenses you can write off by referring to your accountant or reviewing Publication 463 on the IRS website.