How to Use Your Car As a Tax Write-off

The 2021 tax filing deadline for individuals may have been pushed back by more than a month to May 17, but taxes are still on plenty of peoples’ radar. For employees, independent contractors and business owners alike, deductions are top of mind. Knowing how to use your car as a tax write-off can go a long way if you’re eligible to do so.

Who can use their car as a tax deduction?

For the 2020 tax year, the only people who can write off their car on their taxes are self-employed individuals and business owners. Note that this does not include employees who receive W-2 compensation.

How to use your car as a tax write-off as a business owner

If you’re a business owner and use your car solely for business purposes, the vehicle in question is entirely deductible. However, if you use your personal car for business, you will need to split the deduction. Figure out what percentage of your mileage goes toward business (an estimate is fine, but you may want to be conservative if you don’t have the exact metrics; keeping track is always best when it comes to the iRS). You’ll use this percentage to deduct a portion of your vehicle expenses.

To do so, you can either:

• Use “actual expenses”
• Use standard mileage

Let’s talk about actual expenses first. This means tallying up the total cost of:

• Your car’s depreciation
• Lease payments (if you don’t own the car)
• Fuel and oil costs
• Tires, repairs and tune-ups
• Insurance
• Registration costs

As for the standard mileage rate, you need to use it for the full time you use the car for your business starting at year one (if you lease your car, you need to use this method for the full lease period). This is to help maintain consistency with the IRS. For the 2020 tax year, the standard mileage rate is $0.575 per mile (which is a decrease of half a cent from 2019).

Either way, keep all your receipts—electronic and print—and mark any service dates and travel appointments on a calendar.  

How to use your car as a tax deduction as a self-employed person

Self-employed people follow pretty much the same protocol for deducting vehicle expenses from their taxes as do business owners. The IRS largely views self-employed people in the same light as individual LLCs or solo corporations (they’re even allowed to get an employee identification number, or EIN, in place of a social security number for work purposes).

Consider hiring an accountant to help you determine which is more advantageous: calculating actual expenses or using the standard mileage rate. For self-employed folks, taxes are of concern pretty much the whole year round.

What employees should know

Some employees used to be able to deduct car expenses on their taxes, but it’s no longer allowed as of 2017. This is true even if the employer doesn’t reimburse car-related expenses for their workers. If anything, this is a negotiation factor all employees should keep in their pocket.

If you fall under this category, find out if you can write off expenses relating to general travel that haven’t been reimbursed by your employer. IRS Publication 535 goes more in-depth.

Regardless of your entity, keep in mind that the IRS changed their rules for who can and cannot use their car as a tax write-off in July 2019. If you used to deduct your vehicle for taxes, you should revisit the regulations before doing so again. When it comes to your taxes, it’s better to be safe than audited.