Everything You Need to Know About Deducting Your Ride
Whether you run a small business or own a large company, your ride could be your biggest opportunity when it comes to the taxes you pay. Every time you meet with clients, deliver an order or go to ship a package, you take on certain costs that could be tax-deductible. Here's what you need to know.
Understanding Vehicle Deductions
When it comes to your vehicle, there are two types of deductions you can take. The first is the standard mileage deduction. To use this method, you would need to track all the miles you drive for work and multiply it by a set standard. Every year, the IRS sets this standard deduction per mile. (Last year it was 53.5 cents per mile, but it can change.) This number is meant to include all the wear, tear, maintenance and depreciation on your vehicle.
Alternatively, you can deduct a percentage of the actual costs for your vehicle. This can include your taxes on the vehicle, oil changes, new tires, vehicle loan interest, insurance and more. Under this method, you would divide the number of documented miles you've driven for work by the total miles you drove that year. This is the percentage of your expenses that you can deduct (also called "basis.")
In general, if you drive a very fuel-efficient car, the standard mileage deduction may make the most sense. In contrast, if your vehicle needed a lot of work in the year (e.g., you put on new tires, had a headlight go out and paid for a tune-up), you might save more money by using your actual expenses. Try it both ways, but just remember that you need to document everything.
Depreciating Your Car
You can also deduct the depreciation on a vehicle you own if you choose to deduct your actual vehicle expenses. Depreciation lets you deduct a percentage of the value of your car every year until the purchase price is met. The only requirements are that you own the vehicle, use it for business and deduct the actual expenses you incur. Note: You cannot count depreciation if you use the standard mileage deduction.
There are a few different methods for depreciation, including the MACRS depreciation, the Section 179 deduction and special depreciation allowances. Talk to your accountant about the best depreciation method for your situation.
Deducting Your Uber, Lyft, Taxi or Ride Share
Of course, sometimes you may take transportation other than your own vehicle, such as a taxi or a ride-sharing service like Uber or Lyft. These expenses may also be tax-deductible. If you are self-employed, these expenses can be deducted on your Schedule C as a travel expense. If you work for someone else, you can deduct the cost of your trip, as well the tip you give your driver, as miscellaneous write-off. However, the latter only works if you itemize your deductions and have enough expenses to warrant itemizing.
Leasing a Business Vehicle
If you decide to lease a vehicle for work instead of buying one, you can still take a deduction. You cannot take any amount of depreciation on the vehicle, but you can deduct the lease payment as long as you choose the actual cost method of vehicle deduction on your taxes. You can deduct the full amount if you only use it for work or you can deduct the basis that you do use the vehicle for work purposes (e.g., 50 percent).
Ultimately, your ride could be one of the biggest deductions you have -- but keep good records. Each method of deducting your vehicle expenses on your taxes requires an accurate tally of the miles you traveled, the dates of those trips and the purpose of your trip. Without that information, you cannot take the deduction.