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19 September, 2022

Automobile Tax Deductions for Small Businesses

As a small business owner, have you tallied all the miles that you drive on a weekly or even a daily basis to tend to the needs of your company? You would probably be surprised at how fast you could rack up hundreds of miles in a short period of time. 

Think of all the circumstances requiring you to get behind the wheel for business purposes. They might include the following: 

1)     Attending client lunches

2)     Obtaining office supplies

3)     Dropping off packages at the post office4)     Being at off-site company meetings and retreats

5)     Going to and from the airport for business trips

6)     Meeting with customer

7)     Visiting satellite offices

You will be glad to know that you can take a tax deduction for the business use of your personal car. To claim the deduction you must keep track of the mileage when you are driving for business-related reasons. 

Deducting your car  is one of the most convenient yearly deductions for small businesses. But many business owners are not aware of this tax write-off. Because of their lack of knowledge, a lot of owners do not take full advantage of this tax break, or they do it incorrectly. 

Be aware of using your vehicle for both personal and business purposes. You are only able to deduct the costs for business use. This formula should help you when you separate the two types of uses: 

Business Miles You Drove / Total Miles You Drove in the Year – Business Use 

How Vehicle Tax Deduction Works for Your Small Business 

You cannot deduct your commuting miles, to and from work and back to your home. However, you can deduct the cost of traveling from one business location to another. 

There are numerous considerations to explore so you can gain the most from this business expense.

Leasing or Owning? 

One major factor affecting this car-use tax write-off is whether you own or lease your vehicle. The write-off will be based on many things that include where you operate your company, your credit score and/or cash flow, and how frequently you travel for your work. 

You may want to opt for the leasing option, as leasing could cost you less per month. However, there are limits to the miles you can use for a leased car. 

If you have a leased vehicle, there are a few things to consider. For example, if you use the standard mileage rate, the lease payment is not tax deductible. If you use the actual expense method, you will not be able to depreciate the automobile.

Standard Mileage or Actual Expense

One major decision you need to make as you ponder the idea of getting a tax write-off for car use is whether to take the actual expenses incurred during the year or the standard mileage rate. The standard mileage rate for 2021 was 56 cents per mile. 

When you take the standard mileage deduction, you will be able to expense the interest on a car loan, as well as the cost of parking, tolls, and registration fees. However, you cannot deduct the amount you pay for parking at your place of employment. 

If you decide to use the standard mileage rate method, you multiply the number of business miles driven by the standard mileage rate.  

One advantage of using the standard mileage rate is your ability to deduct the business portion of personal property taxes you pay on your automobile. Personal property taxes are taxes you pay based on the value of your vehicle. An example of this tax is a city excise tax. 

A perk for those who are self-employed is deducting your car loan interest related to your business use of the car.  

Be aware, however, that you cannot use the standard mileage rate if you: 

  • Use five or more vehicles for your business at the same time 
  • Claim depreciation deduction for a car using a method other than straight-line
  • (The straight-line method is the most commonly used method for calculating depreciation.) 
  • Claim actual expenses after 1997 for a car you leased 
  • Used the actual expenses method in the first year you placed the automobile in service 
  • Claim Section 179 deduction on the vehicle 

Now let’s look at the actual expenses option. An alternative to the standard mileage deduction is taking actual vehicle expenses. 

Actual Expenses include the following:  

  •   Tolls
  •   Garage rent
  •   Registration fees
  •   License plates
  •   Repairs
  •   Insurance
  •   Parking fees
  •   Gas and oil
  •   Tires
  •   Washing and polishing

You are also able to deduct depreciation if you own your vehicle. If you are leasing your car, you can deduct the lease payments pertaining to the business use of your automobile. 

The actual expense option has been extremely popular because of the included depreciation expense. As a result, there are business owners who choose to buy a luxury vehicle in order to take advantage of a higher depreciation.  

If you are driving your car for personal use, you can still take this depreciation. Keep in mind,  the deduction will be given at the rate in which you used the vehicle for business. Sport utility vehicles weighing between 6,000 and 14,000 pounds can be completely expensed. This means buying a jeep for $40,000, allows you  to write off the total price for the first year.

Actual Expense & Varying Mileage 

Keep in mind that you can change from the standard mileage deduction to the actual expense method. Nonetheless, the basis of your vehicle will be decreased by a portion of the standard mileage rate that is deducted. This portion translates into a small-to-no-depreciation expense in the future. Also, you are not permitted to make another switch back from the actual expense to standard mileage deduction.

Look to Drilldown Solution for Expert Tax Planning Services Helping You Identify Tax Deductions for Your Small Business

Our tax planning services at Drilldown Solution include helping you figure out what tax deductions your small business qualifies for, and includes potentially deducting the use of your vehicle for tax purposes. 

Drilldown Solution delivers a seamless tax planning and compliance process.  As is the case with all of our programs, tax planning solutions are custom-made based on an individual’s needs, wants, and the goals of your business.  You can expect your business to greatly benefit from our dedicated team of tax experts, ensuring your tax planning needs are met quickly and efficiently.  

Our Provo, Utah Tax Planning Services are just what your small business needs.


Note: The material and contents provided in this article are informative in nature only. It is not intended to be advice and you should not act specifically on the basis of this information alone. If expert assistance is required, professional advice should be obtained.