How Solo Entrepreneurs can write off their business expenses
How Solo-Entrepreneurs Can Deduct Their Vehicle Expenses
Standard Mileage vs. Actual Expense Method is where it’s at!
You drive your vehicle around for your business, whether it is meeting clients, picking up office supplies or attending a networking event. And you may be able to write off some of your vehicle expenses on your taxes because of that. But you must meet specific criteria to be able to deduct your auto expenses.
There are two methods available for deducting expenses related to auto expenses. They are the standard mileage rate and the actual expense method.
Here are 3 simple tax rules for using either method to deduct your vehicle expenses and save money on taxes.
Rule 1: Keep accurate records. Maintain a trip or mileage log to record your vehicle usage. There are apps available that can help you keep track of your mileage – Mile IQ and QuickBooks Self- Employed both offer mileage trackers.
Rule 2: Allocate business/personal use. You will need to keep track of both the number of your business and personal miles driven. One way to do this is to record your business mileage and subtract it from your total annual mileage shown on your odometer for the year.
Rule 3: Choose a deduction method You can use the standard mileage method or the actual expense method. You will want to select the one that gives you the larger tax deduction. It is a great idea to run the numbers using both method and then pick one. Keep in mind that there are some limitations to switching back and forth between methods.
Let’s look at some of the differences between the standard mileage method and the actual expense method quickly.
What is the standard mileage method?
This method requires you to calculate the total of miles you’ve driven for your business and multiply it by the standard mileage rate. The standard mileage rate for the 2021 tax year is 56 cents per mile. So, if you drive a total of 5000 miles for your business or freelance work, you may qualify for a business tax deduction of $2800.
How do I know if I can use the standard mileage rate?
To be able to use this method, you must:
Have used this same method since your first bought or leased your car.
Plan to use this method for the entirety of your lease or loan.
Not use more than four vehicles in your business operations.
Be sure to note that you cannot use this method if:
You’ve used the actual expense tax deduction and claimed accelerated depreciation deduction in previous years.
You have claimed a Section 179 deduction on your vehicle.
But if you use this method, there are some things you can’t deduct, like:
Lease payments
Depreciation
Your actual auto expenses
Now, how about the actual expenses method?
The second method you can use on your taxes is the actual expenses method. And you want to use this method if you are not able to use the first method or if you simply just want to use it.
However, you must use this method if you have a fleet of vehicles for your business, have used standard mileage rate for your leased vehicle, or you’ve used the actual expense calculation when your car was first bought for business. You cannot switch methods.
Here are some deductions you can make using the actual expenses method:
Interest on a vehicle loan.
Vehicle depreciation.
Registration fees and tax.
Parking fees and tools.
Lease payments.
Insurance.
Gasoline.
Maintenance.
Repairs.
You can only deduct the same percentage on your taxes that correlates to how much it was used for your business. So, for instance, if you used it for business 70% of the time, you can only deduct up to 70% on your taxes.
Whatever option you’re considering for your taxes this year, let the tax experts at Tax Charm help you navigate the choppy waters of tax preparation! We’re always here to help!
