Most small business owners and self-employed persons use their personal car for business. This article is covering in short what can and cannot be deducted as a business use of a car.
The following chart below can be used by most self-employed persons as a guidance (taken from the IRS website):
Transportation Expenses: are expenses that incur while getting from one workplace to another in the course of your business: visiting customers and clients; going to business meeting away from your regular place of work; getting from your home to a temporary workplace when you have one or more regular places of work.
Transportation expenses usually can be deducted if:
1. You have one or more regular work locations away from your home, OR
2. You work from home (your residence is considered your main place of business) and you have expenses going between your residence and another work location, regardless if the work is temporary or permanent and regardless of distance.
Home: is the place of your main residence. Transportation between your home and your regular place of business is never deductible
Regular or main job: is your principal place of business. If you have more than one place of work, consider the time you spend at each, type of activity and income earned at each.
Temporary work location: is a place where your work is realistically expected to last less than 1 year. Unless you have a regular place of business, your transportation expenses to a temporary work location can be deducted round trip. If a work location is realistically expected to last more than 1 year, than this is no longer a Temporary Work Location and commuting expenses to and from are not deductible.
Second Job: If you work at more than one location during one day, you can deduct your transportation expenses from getting from one workplace to another. If you do not go directly from your first job to your second job, you cannot deduct transportation expenses that are more than it would have been if you would go directly from your first job to your second job. You cannot deduct transportation expenses on a day when you go only to your second job.
Commuting expenses: You cannot deduct expenses of taking a bus, trolley, taxi, subway, or driving a car between your main home and your regular place of work. These expenses are personal commuting expenses and are not deductible even if you work during the commuting trip. Example: You use your phone to discuss business matters during your commuting trip, sometimes your business associates ride with you and you discuss business matters in the car – these do not change the trip from personal to business and these expenses are still not deductible.
Parking Fees: if you have parking fees for parking your car at your main work place – these are not deductible. If you incur parking fees while visiting a customer or client – these fees are deductible.
Advertising Display on the Car: putting a display material that advertises your business on the car does not change the use of the car from personal to business. You still have to consider the purpose of the car and the commute. If you use the car for personal commute, you still cannot deduct those transportation expenses.
Car Pools: If you use your car in a car pool and the purpose is not for profit, you cannot deduct the cost of using the car. If you receive any payments from the passengers, do not include those payments in your income, those are expense reimbursements. Contrary, if you use your car to car pool for profit, then you need to include the passenger payments in income and also you can deduct the costs of operating a car.
Hauling Tools or Instruments: hauling instruments and tools in your car while you commute to and from work, does not make your car expenses deductible; but you can deduct any additional expenses for hauling the tools and instruments, such as renting a trailer.
Home Office: if your home office is considered your main place of business, you can deduct transportation expenses between your home and another work location in the same trade or business.
Examples: For one week you need to go every day to a customer location and do work from the customer’s office- in this case the transportation expenses are deductible. You can also deduct the round trip for visiting a client or customer.
In case that you do not have a main place of business and you also do not have a home office, the location of your first business contact inside the metropolitan area is considered to be your office. Transportation between your home to your first business contact and from your last business contact back to your home are not deductible expenses, but you can deduct transportation expenses going from one client to another.
Car Expenses: usually if you use your car in the course of business, you can use one of the two methods for figuring deductible car expenses:
1. Standard Mileage Rate
2. Actual Car Expenses
Standard Mileage Rate: the standard mileage rate for 2016 is 54 cents per mile. If you use the mileage rate for a year, you cannot use the Actual Car Expense method for that year. You cannot deduct depreciation, lease payments, maintenance, fuel, insurance, etc. in this case. If you want to use the mileage rate method, you need to use it in the first year when your car is available to be used in the business, then you may choose to use either method in later years. If you want to use the standard mileage rate for a car you lease, then you have to use this method for the entire term of the lease.
If you are self-employed and you use your car for business, you can deduct the part of interest for the car loan that represents the business use of the car. For example, if you use your car 60% for business, you can deduct 60% of interest paid on a car loan.
You can also deduct business parking fees and tolls in addition to the standard mileage rate.
Actual Car Expenses: that may be deducted:
• Depreciation & licenses
• Lease Payments
• Registration fees
• Garage Rent
• Parking Fees
If you qualify to use either method: standard mileage or actual expenses, you can choose the method that gives you the biggest deduction.
If you have fully depreciated a car that you still use for the business, you still can continue to claim the actual expenses for the business use of the car.
If you use the car for business and personal, then you need to figure out the percentage for business and personal use and divide the car expenses accordingly.