Tracking and Deducting Vehicle Expenses for Small Business Owners

As a small business owner, keeping track of your vehicle expenses is crucial for accurate bookkeeping and maximizing tax deductions. Whether you use a vehicle primarily for business purposes or have a mixed-use vehicle, understanding how to track and deduct these expenses can save you valuable money. In this article, we will delve into the key aspects of tracking and deducting vehicle expenses for small business owners, providing you with useful tips and examples to help you navigate this important area of bookkeeping. 

Determine Business Use Percentage:  

The first step in tracking and deducting vehicle expenses is determining the percentage of vehicle use for business purposes. If your vehicle is solely used for business, this is relatively straightforward. However, if you also use your vehicle for personal use, it's crucial to accurately calculate the business use percentage. The business use percentage is the ratio of business miles driven to total miles driven. 

Example: Let's say you drove a total of 10,000 miles (about 16093.44 km) last year, and 7,000 miles (about 11265.41 km) were for business purposes. To calculate the business use percentage, divide 7,000 by 10,000, resulting in 0.7 or 70%. 

Types of Vehicle Expenses:  

To effectively track and deduct vehicle expenses, it's essential to understand the different types of expenses that can be incurred. Common vehicle expenses that can be deducted include: 

  • Gasoline and Fuel: Keep track of all fuel expenses incurred during business-related trips. 

  • Maintenance and Repairs: Expenses such as oil changes, tire replacements, and general vehicle maintenance can be deducted. 

  • Depreciation: If you own the vehicle, you can deduct a portion of its depreciation based on its business use percentage. 

  • Insurance: Deductible expenses for auto insurance related to the business use of your vehicle can be claimed. 

  • Lease Payments or Loan Interest: If you lease the vehicle or have a car loan, a portion of the monthly payments or interest can be deducted. 

  • Parking and Tolls: Expenses related to parking fees and tolls incurred during business travel are deductible. 

Documentation and Record Keeping:  

Maintaining accurate and detailed records is crucial when tracking vehicle expenses. The IRS requires proper documentation to substantiate your deductions. Here are some best practices for record keeping: 

  • Mileage Log: Keep a mileage log to record the starting and ending mileage for each business trip, along with the purpose of the trip. 

  • Receipts and Invoices: Retain all receipts and invoices related to vehicle expenses, including fuel purchases, maintenance and repair bills, insurance payments, and any other relevant documents. 

  • Digital Tools and Apps: Utilize digital tools or smartphone apps specifically designed for mileage tracking and expense management. These can simplify the process and ensure accurate records. 

 

Deducting Vehicle Expenses:  

Once you have accurately tracked your vehicle expenses, you can deduct them when filing your taxes. Two common methods for deducting vehicle expenses are: 

  • Standard Mileage Method: Multiply the business miles driven during the tax year by the standard mileage rate set by the IRS. For 2023, the standard mileage rate is $0.575 per mile. This method also allows you to deduct tolls and parking fees separately. 

Example: If you drove 5,000 business miles in a tax year, you can multiply it by the standard mileage rate of $0.575, resulting in a deduction of $2,875. 

  • Actual Expense Method: Calculate the actual expenses incurred for your vehicle, including fuel, maintenance, insurance, and other eligible costs. Apply the business use percentage calculated earlier to determine the deductible portion. 

Example: If your total vehicle expenses for the year amount to $8,000 and the business use percentage is 70%, you can deduct $5,600 ($8,000 * 0.70) as vehicle expenses. 

Tracking and deducting vehicle expenses for small business owners is essential for accurate bookkeeping and maximizing tax deductions. By determining the business use percentage, identifying the different types of deductible vehicle expenses, maintaining proper documentation, and choosing the appropriate deduction method, you can ensure that you are taking full advantage of eligible deductions. 

Remember, accurate bookkeeping is the foundation of financial success for your business. For more valuable bookkeeping tips and resources, visit and subscribe to our blog at www.completed-ledgers.com. Stay informed and empowered as you navigate the world of small business finances.  

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