As a small business owner, you’re always looking for ways to reduce your taxable income and keep more money in your pocket. One of the most commonly overlooked opportunities for tax deductions is your business vehicle. Whether you drive a car, truck, or van, the IRS allows you to deduct expenses related to business use of your vehicle, which can make a big difference come tax time.

In this post, we’ll break down the rules around vehicle deductions for small businesses and how proper bookkeeping can ensure you’re maximizing your deduction potential.

What Vehicle Expenses Are Deductible?

There are two main ways to deduct vehicle expenses for your small business: standard mileage rate or actual expenses. You can choose the method that results in the largest deduction, but it’s essential to keep accurate records in either case. Here’s a closer look at each method:

1. Standard Mileage Rate

The standard mileage rate is a simplified way to calculate your vehicle deduction. For 2024, the IRS standard mileage rate is 67 cents per mile for business use. This method allows you to simply multiply the number of business miles driven by the standard rate.

What Qualifies as Business Mileage?

• Driving to meet clients
• Traveling between different job sites
• Running business-related errands (e.g., going to the bank, post office, or office supply store)
• Business travel to conferences, trade shows, or meetings

What Doesn’t Count as Business Mileage?

• Commuting to and from your home to your primary place of business.
• Personal trips mixed with business (unless you can accurately separate the business portion)

Tip: Good bookkeeping practices, such as using a mileage tracking app or keeping a detailed log, are crucial for making sure you don’t miss any deductible miles. MileIQ is a great app that helps you track your business mileage.

2. Actual Vehicle Expenses

The actual expense method allows you to deduct a percentage of your vehicle expenses based on how much you use the vehicle for business. For example, if you use your car 60% of the time for business, you can deduct 60% of your total vehicle expenses.

These expenses include:

• Gasoline
• Maintenance and repairs
• Tires
• Insurance
• Registration fees
• Lease payments or vehicle depreciation

With this method, it’s important to have a solid bookkeeping system to track all vehicle-related expenses throughout the year. You’ll need to calculate the business use percentage and apply it to your total costs.

Parking and Tolls

Parking fees and tolls incurred for business purposes should be deductible, regardless of whether you use the standard mileage rate or actual expenses method. With the standard mileage method, parking and tolls are deductible on in addition to the per-mile rate. If you choose the actual expense method, these costs are added to other vehicle-related expenses like gas and repairs. Personal parking fees and tolls, including those for commuting, are not deductible. Keeping accurate records of these expenses ensures you claim the maximum deduction.

Choosing Between the Standard Mileage and Actual Expense Methods

You can choose whichever method gives you the largest deduction, but you must stay consistent in how you apply it year after year. The standard mileage rate is easier to calculate but may result in a smaller deduction if you have high vehicle-related costs. The actual expense method requires more detailed recordkeeping, but if you have a newer or more expensive vehicle, this method may give you a larger deduction.

Key bookkeeping tip: Keeping track of all your vehicle expenses and mileage from day one makes it easier to calculate your deductions at tax time. This is where good bookkeeping software, like QuickBooks, can make the difference.

How Bookkeeping Helps Maximize Your Vehicle Deductions

Accurate and detailed bookkeeping is essential when it comes to vehicle deductions. Without proper documentation, the IRS may disallow your deductions. Here’s what you need to track:

• Mileage logs: Whether you use the standard mileage rate or actual expense method, you need a detailed log showing the date, destination, purpose, and number of miles driven for each business trip.
• Receipts: Keep all receipts for gas, maintenance, insurance, and other vehicle-related expenses. If you’re using the actual expense method, these are essential to support your deductions.
• Business use percentage: Calculate the percentage of time your vehicle is used for business versus personal use. This is key if you’re claiming actual expenses.

By keeping up-to-date financial records throughout the year, you can ensure that you claim every deduction you’re entitled to, saving you money and reducing your tax liability.

Final Thoughts

Understanding and applying the correct vehicle deduction rules for your small business can significantly impact your bottom line. Whether you choose the standard mileage rate or the actual expense method, solid bookkeeping practices are the foundation of maximizing your deductions. Make sure you’re tracking every business mile and every expense so you can reduce your taxable income as much as possible.

Need help with tracking expenses and managing your small business finances? At Bullseye Bookkeeping, we specialize in helping small business owners stay organized, compliant, and profitable. Contact us today to learn how our bookkeeping services can support your business and maximize your deductions!