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Deducting Automobile Expenses

Article by: Jeff Skolnick, CPA, M.S. Taxation

Who can deduct automobile expenses?

Any business may reimburse individuals who use their automobiles for business purposes and deduct those expenses.  This includes self-employed individuals as well as small or large businesses.  You must keep in mind; however, that commuting mileage does not count as business mileage. Additionally, the automobile should be owned by the business entity and not the individual.

There are special rules if you are an employee.  For many years you were able to deduct your expenses; however, your deduction was reduced by any reimbursements received from your employer.  Your overall deduction was reported on your tax return as a “miscellaneous” deduction on Schedule A. These expenses when added together with other miscellaneous deductions such as other unreimbursed employee expenses, union dues, investment fees and tax preparation fees were deductible to the extent that they exceeded 2% of your adjusted gross income (AGI). 

As of 2018 miscellaneous itemized deductions subject to 2% of your adjusted income were all eliminated.  2017, therefore is the last year these expenses were allowed as a deduction on a personal income tax return. These new rules force employees to request reimbursement from their employer, otherwise the employee will be out the money.

What automobile expenses are deductible?

When deducting automobile expenses, you have a choice of one of two methods.  The first method is to use actual expenses.  Actual expenses would include gasoline, oil, repairs, registration fees, insurance, depreciation and lease payments.

The second method would be to use the standard mileage rate published by the IRS.  Using the standard mileage rate eliminates the need to keep track of all of the above expenses.  You simply track the amount of business mileage driven and multiply those miles by the appropriate rate.  The standard mileage rate for 2019 is 58 cents per mile.   

Parking fees and tolls can be taken as additional expenses whether you elect to use actual expenses or the standard mileage rate.

In this blog I am concentrating on business mileage. Keep in mind the mileage rate for those who itemize and use their vehicle for medical reasons may use a standard mileage rate of 20 cents per mile as a medical expense deduction also 14 cents per mile if the vehicle was used for charitable purposes.  Keep in mind that the medical mileage increases medical expenses, however, medical expenses must exceed 10% of Adjusted Gross Income (AGI) in order to count as an itemized deduction.

Additionally, charitable mileage counts as an itemized deduction but in order to benefit from either medical mileage or charitable mileage you must itemize on your tax return.  Please keep in mind with the new higher standard deductions (ie $24,000 for married individuals filing jointly) far fewer individuals will itemize than used to be the case.

Can I switch from one method to the other in later years?

You are not allowed to switch from the actual expense method to the standard mileage method in a later year.  You are allowed to switch from the standard mileage method to the actual expense method in a later year although there are some special rules concerning depreciation expense.

It is therefore very important to plan your expected benefits under each method before you report the expenses of a vehicle placed in service during the year as your first year of reporting has an impact on all future years.

Special rules for Luxury Automobile Depreciation

Long ago tax law carved out a special deduction for luxury automobiles. This was done to stop the very wealthy from deducting what were determined to be luxury automobiles as an ordinary and necessary business expense.  Think about from a standpoint that the IRS does not want to see a business depreciating a $300,000 Ferrari over five years.  Almost everybody would agree that a write off of that nature is over the top. 

The problem was the IRS for years was using a figure that was far too low.  For 2017 the luxury automobile depreciation limitations were $11,160 in year 1, $5,100 in year 2, $3,050 in year 3 and $1,875 in each subsequent year until the automobile is either fully depreciated or disposed of.  These limitation figures allowed taxpayers a write off of only $23,060 after five years.  It would be difficult to find anyone that would classify an automobile with a price tag of $23,060 a luxury automobile. 

Luckily the new tax law made changes to these figures and beginning in 2018 the new luxury automobile limitations are $10,000 in year 1, $16,000 in year 2, $9,600 in year 3 and $5,760 in each subsequent year.  These new limitations allow for $47,120 of depreciation on a luxury vehicle over the first five years.  I feel this adjustment was long overdue and makes much more sense in today’s world.

Recordkeeping Requirement

In order to deduct automobile expense, you should keep a log in which you record the date, where you traveled, the business purpose, the mileage and any expenses incurred such as gas or tolls.  Nowadays this has become much easier with the use of telephone apps that can track this for you.  Keep in mind if you do not meet the substantiation requirements, then your automobile deduction may be disallowed.

Conclusion

This blog gives only the very basics concerning automobile expense deductions. Once again if you’re not sure of the rules, then check with a tax professional before taking these deductions. 

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