Prepping for your annual tax return as a sole proprietor usually means shuffling — or scrolling — through a mountain of receipts. The new laptop. More printer ink. A work conference ticket. They all become line-item deductions on your Schedule C. But what about car expenses? Some business owners, like nannies, consultants and real estate professionals, are on the road daily. Should oil changes and visits to the gas station also be incorporated into your tax return? Here’s everything you need to know.
Fueling Your Auto Tax Deductions
My tax preparer explained to me that when a car is used for both personal travel and business use, you can deduct a portion of the expenses accrued while working, excluding the commute to a coworking space. You have two options here: You can either save your receipts for every service and fuel fill-up, or take the standard deduction.
Option #1: Save Your Receipts
The first method can be a little cumbersome, but it’s not impossible to manage. If you plan to save your receipts, figure out the best way to organize them. For example, you could use an old-fashioned filing system or an app on your smartphone (check out VehiCal and Stride Tax). By staying on top of all your receipts, you can prevent yourself from getting into a situation in which you’re in a mad dash to track down all the information you need just before your tax prep appointment.
When you eventually do meet with your tax preparer, inform him or her of the percentage of time your vehicle is used for work, so the amount deducted can be pro-rated to reflect its application to your business. For example, if you’re a real estate agent who drives potential home buyers to see properties for four hours each day, you can deduct 25 percent of your bill at the gas pump. According to my tax preparer, the government assumes you spend eight hours a day sleeping and eight hours working — leaving you with eight hours of free time. That means you have 16 hours to drive the car. If four of those hours were used for work, 25 percent of the fuel cost is deductible.
The bottom line here is that consumables — like fuel, oil, car washes, vehicle registration fees for your city or state and windshield washer fluid — can all be deducted. But like any expensive business equipment, your car depreciates in value over time. When it comes to repairs on an individual vehicle (not a business fleet) used for both work and personal use, the lines blur. My tax preparer explained that regular maintenance like tire rotations or installing a new alternator are just part of being a car owner — which means they can’t be deducted.
I used the receipt method when I first started out, but it eventually turned into a headache. My hours in the car each week varied, and I couldn’t deduct major car repairs. In the end, it was easier to streamline my office tasks and switch to the standard deduction.
Option #2: Take the Standard Deduction
According to the Internal Revenue Service (IRS), the standard car-related deduction is based on actual mileage driven. To keep things simple, I regularly update a log of odometer readings and where I’m going for each business trip. If you want to go paperless, TripLog or MileIQ are worth exploring.
In 2017, the “standard mileage rate for the cost of operating your car for business use” was 53.5 cents per mile. It sounds high, but it’s not just to reimburse you for gas. It’s meant to cover a portion of your routine auto maintenance, too.
Unfortunately, you can’t submit receipts for the following car expenses if you take the standard deduction:
- Estimated vehicle depreciation
- Car lease payments
- Maintenance, services and repairs
- Gasoline and its accompanying taxes
- Oil and oil changes
- Car insurance
- Vehicle registration fees
No matter which option you choose, you could be looking at big savings during tax time. It’s up to you to discover which method works best for your freelance lifestyle.
Rev Up Your Savings
Remember to think beyond your car itself. Expenses accrued while using a vehicle for work — including road tolls, valet parking fees and parking meter charges — are deductible. Every little bit counts when you’re trying to reduce your income level and fit into a lower income tax bracket as a freelancer.
Of course, tax laws are updated every year. It’s always best to have a discussion with your tax preparer regarding the types of receipts and information you should bring to your appointment to get the most deductions possible. The best way to determine which of the two methods is right for you (and would save you the most money) is to use both of them at the same time to track your vehicle expenses for one full year, and then compare the data.
If you spend a lot of time behind the wheel like I do, the standard mileage deduction can add up fast, reducing your income by thousands of dollars so you owe less in taxes. To me, it’s worth tracking and claiming the deduction on my annual tax return. A little extra work goes a long way — in both money and time saved — when it comes to tax prep.