One of the most common questions I get from clients during tax season is whether or not they can write off their car. While you may have heard stories of doctors who buy sports cars in order to save on taxes, the rules around car deductions are pretty strict.
Depending on what you do for work, how often you use your car, and the type of expenses you have, you might be eligible for the business use of car deduction.
Here is an overview of Business Use of Car deductions:
Who can do it?
While this deduction was available to most taxpayers in the past, the Tax Cuts and Jobs Act of 2017 disallowed unreimbursed employee business expenses from 2018 to 2025. Translation: only self-employed taxpayers can deduct their car expenses.
To be considered self-employed, you must be a sole proprietor, a small business owner, or an independent contractor. Employees who receive a W-2 from their employer are not eligible. However, you can be both an employee of a company and also have a side-hustle as a contractor and qualify.
What is considered business use?
Once you have determined that you are self-employed, you need to use your car for business-related activities. These activities include:
- Driving to meet a customer
- Driving to purchase inventory or supplies
- Driving to deliver products
Specific activities that do not count include:
- Commuting (i.e., driving from your home to your office)
- Personal trips (i.e., going on vacation or to the grocery store)
It is important that you track which mileage is for business and which is for personal. The IRS allows a deduction of $0.585 per mile for the first half of 2022 and $0.625 per mile for the second half of 2022.
What expenses are eligible?
An alternative to deducting your business miles is to deduct your actual vehicle expenses. These expenses include:
- Gas and oil changes
- Maintenance and repairs
- Registration fees and taxes
- Auto insurance premiums
- Lease payments
- Parking fees
For example, let’s assume you use your car 70% of the time for business (meaning you drove 10,000 miles total for the year, 7,000 of which were business use). If you had $7,500 of actual vehicle expenses, then you would be able to deduct $5,250 ($7,500 X 70%). You are able to select if you would like to use the standard mileage rate deduction or actual expenses deduction each year.
What if you’re an employee?
So what happens if you’re a W-2 employee that uses your car constantly for work? Since you are not able to write your car expenses off on your taxes, you should ask your employer to reimburse you.
If your employer agrees, you could be eligible to receive a business mileage reimbursement, tax-free with no taxes withheld. This means if you drive 250 for work, you can receive up to $150 of tax-free reimbursement from your employer.
Understanding the rules surrounding the business use of car deduction can help you save on taxes each year. If you would like to work with a financial planner to walk you through your options, I would love to help you!
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Disclaimer: This blog is for informational purposes only, and should not be considered advice or recommendations. All opinions expressed herein are solely those of Amaral Financial Planning, LLC, unless otherwise specifically cited. Material presented is believed to be from reliable sources and no representations are made to another parties’ informational accuracy or completeness. You should consult your financial advisor, tax professional or legal counsel prior to implementation.