Preface: “The one thing that unites all human beings, regardless of age, gender, religion, economic status, or ethnic background, is that, deep down inside, we all believe that we are above-average drivers.” ― Dave Barry
Deducting Expenses for Use of Your Car
If you use your car for business purposes, you can deduct car expenses from your business income. Business use includes delivery and rideshare (“gig”) drivers, but does not include drivers who are employees. Be aware that for tax years 2018-2025, the cost of using your car as an employee is no longer allowed as an unreimbursed employee travel expense.
This article will help you determine what costs are considered business use and explain how to figure your deductions.
You can generally use one of the two following methods to figure your deductible vehicle expenses.
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- Standard mileage rate.
- Actual expenses.
Standard Mileage Rate (SMR)
The SMR method is the simpler of the two methods. The important thing for deducting SMR is to keep track of how many miles you drove for business during the year. You should use a logbook or app to track your business miles. To take the deduction, you just multiply the number of miles by a fixed dollar amount that is set by the IRS each year. For 2023, the standard mileage rate was 65.5 cents per mile.
There are four additional car-related expenses you are allowed to deduct if you use SMR. These are: parking fees and tolls, the interest portions of your car loan payments, and personal property tax assessed on your car by any state or local jurisdiction.
If the car is not used 100% for business, the interest expense and personal property tax must be prorated for the business use percentage of the car. If you use the SMR method, one easy way to figure business use percentage is to take a picture of your odometer every New Year’s morning. This lets you easily compute the total miles driven during the year. If you know your business miles, you may then easily find your business percentage by dividing your business miles by your total miles.
Parking fees and tolls incurred during business trips do not have to be prorated because they are direct business costs.
Parking fees you pay to park your car at your regular place of work are nondeductible because they are considered commuting expenses. Commuter expenses are never deductible, even for the self-employed.
Fines for violations, parking tickets, and other penalty payments are never deductible under any method.
If you want to use SMR, you must choose to use it in the first year the car is available for use in your business. Then, in later years, you can choose to use either SMR or actual expenses. If you want to use SMR for a car you lease, you must use it for the entire lease period.
Actual Expenses
If you choose to deduct actual expenses, you cannot later choose to use SMR. If you use five or more cars for business at the same time during the year, you must use the actual expenses method.
To deduct actual expenses, you must track all car-related expenditures. This includes all previously mentioned car expenses like parking and tolls, interest, and personal property taxes, and also all other expenses such as gas, oil, tires, repairs, registration, insurance, and garage rent. If the car is not used 100% for business, you must figure a business percentage and prorate the costs.
Depreciation
Another business expense you can and should deduct if you choose actual expenses is depreciation. This allows you in effect to deduct the cost of the car itself over the period of its useful life, typically a five-year period. To figure depreciation expense, you will need to know the cost basis of the car and the date you first used it for business. Calculating the exact amount of depreciation to take each year requires a depreciation calculator or depreciation table.
If the car is not used 100% for business, you will need to prorate the depreciable amount.
EXAMPLE: If you spent $50,000 on a car, placed it service on January 1, and used it 60% for business, one way to take the depreciation would be to deduct $6,000 of depreciation expense each year for a total of five years.
You must decease the cost basis of your car for depreciation.
EXAMPLE: Following the above example, you spent $50,000 on a car and deducted $6,000 of depreciation expense each year for a total of five years. If you then sold the car for $25,000, you would actually owe tax on a $5,000 gain on the sale. This might surprise you, since you sold the car for half of what you originally paid for it, but from the IRS’s point of view, the basis of the car is adjusted down by the amount of depreciation. Therefore, at the time you sold the car, it had an adjusted basis of just $20,000. So you actually sold it for more than its basis.
If you use the SMR, you do not need to calculate depreciation because the annual SMR amount includes an amount due to depreciation. For 2023, this amount was 28 cents per mile.
EXAMPLE: If you use the SMR and drove your car 10,000 miles for business in 2023, you take a SMR deduction of $6,550 (65.5 cents per mile for 1,000 business miles). You do not deduct for depreciation expense because the implied depreciation is included in the SMR deduction. However, you must reduce the basis of the car by $2,800 (28 cents per mile for 1,000 business miles).
What Counts as Business Use of a Car?
Traveling from one workplace to another, or to and from clients or customers, is considered business use.
If you have an office or other regular workplace you commute to, driving between your home and regular place of work is not considered business use, even if you are self-employed.
If you drive between many pickup and delivery sites, most of the miles you drive to, from, and between deliveries and pickups are business miles. One grey area is the drive from your home to your first working location and to your home from your last location. These might be considered commuting, and thus not business miles. However, if you are available for new orders at these times, say, by being active on an app that you get work through as you drive, you may plausibly claim these miles as business miles as well.
Side trips out of your way for personal errands should never be counted as business miles.
All documentation to prove your business miles and other vehicle expenses should be kept for three years after the due date of the return.
