Vehicles

Questions about vehicles are one of the most frequent inquiries I get during tax season. There is so much confusion and misinformation regarding the deductibility of vehicle expenses. A vehicle used for business may be owned by the business or by an employee. The method of claiming the deduction will differ depending on the ownership of the vehicle.

Vehicles owned by an employee

If the employee (or owner employee) uses their personal vehicle for business on behalf of the business,

• The employee should submit a request for reimbursement to the business based on the employee’s allowable business mileage. Allowable by the IRS and the business.
• The business then reimburses the employee based on the IRS standard mileage rate (or a lower rate).
• The business gets a deduction for the mileage reimbursement it pays.
• The employee does not report the reimbursement as taxable income.

Vehicles owned by the business

A business deducts vehicle expenses it owns based on the actual operating expenses. The business is also limited to the business-use percentage of the vehicle.

The business can deduct all the operating expenses of the vehicle without regard to the business-use percentage, if the personal-use amount is treated as income to the employee.

In summary, if the vehicle is owned by the employee, the vehicle deduction will be based on the employee’s business mileage. If the vehicle is owned by the business, the vehicle expenses multiplied by the business use percentage will be deductible.