Avoiding the Vehicle Expense Audit Triggers
If you use a vehicle in the course of doing business, there are valid deductions you can take, but the rules have lots of twists and turns. There are far more pages of rules involved in the IRS documentation, but for a quick overview that could answer your basic questions and help you to avoid an audit letter, IRS Publication 463i is the resource. Here is an overview of the Car Expenses section of that publication.
The IRS gives you a choice of two methods for writing off allowable vehicle expenses on your return, the Standard Mileage Rate, and the Actual Car Expenses method. Following are highlights of the two methods.
Standard Mileage Rate
The 2021 standard mileage rate is set at 58.5 cents per mile for allowable business miles. If you choose to use the standard mileage rate for a car that you own, you must make that choice in the first year the car is made available for use in the business. After the first year, you can make a choice between the two methods each year.
If you lease the car you use in business and want to use the standard mileage rate, you must use it for the entire lease period as well as any renewals of the lease after that period. The choice to use the standard mileage rate must be made by the due date, including extensions, of your tax return. You cannot revoke the choice later. You are NOT allowed to use the standard mileage rate if you:
- Have a fleet operation or use five or more cars at the same time.
- Have claimed a depreciation deduction for the car using any method other than straight line.
- Have claimed a Section 179 deduction on the car.
- Claimed a special depreciation allowance on the car.
If none of the above apply, you can use the standard deduction for a car used for hire, such as a taxi.
For personal vehicles used in the business, keep a detailed mileage log with personal and business mileage separately maintained. You can then take the standard deduction for the business miles.
For a business using five or more cars in the business, the standard deduction is not available. The business can in most cases deduct some actual car expenses.
Actual Car Expenses
If you do not or cannot take the standard deduction, you may be able to deduct actual car expenses which include:
- Lease payments
- Registration fees
- Garage rent
- Parking fees
If you use a personal vehicle for business, you can take these deductions based on the mileage log and the percentage of business use.
- Personal property taxes – if you are self-employed and use your vehicle for business, you can deduct the business part of state and local personal property taxes on the vehicle.
- Parking fees and tolls – in addition to using the standard mileage rate, you can deduct any business related parking fees and tolls.
- Sale, trade-in, or other disposition – selling, trading, or otherwise disposing of the vehicle may involve a gain or loss or an adjustment to the basis of the vehicle. Details are in Publication 463.
Recent IRS statements indicate that the two top audit areas on small business returns are home office and vehicle deductions. This overview and the 88 pages of Publication 463 are good for information but consult with tax advisors or accountants to steer clear of IRS scrutiny of vehicle deductions.