Types of Vehicle Use
The IRS classifies vehicle use into three categories: business, personal, and commuting. Only expenses related to business use are deductible. Business use generally includes travel from one place of business to another.
Some common examples of trips that are deductible include travel from:
- Your regular place of business to a customer or client’s place of business.
- One customer or client’s place of business to another.
- A first job to a second job.
- Your regular place of business to the bank or post office for business related activities.
- Your home to a temporary work location that is not your regular place of business, provided you have a regular place of business, and your assignment is temporary and expected to last for less than one year.
- Travel to a temporary work location outside your metro area if you do not have a regular place of business.
Remote work is more common as a result of the COVID-19 pandemic. In this changing work environment, taxpayers should note that travel from a home office may be deductible. If you work out of your home and your home is your principal place of business, you can generally deduct the cost of travel from your home office to other business locations, such as the ones mentioned above.
Personal use generally means any vehicle use that is not business related, including commuting between your home and your regular place of business. This applies even if your vehicle has an advertising display.
Some common examples of non-deductible, personal use trips include:
- Travel from your regular place of business to meet friends for lunch.
- Travel during non-business hours in which you are using your vehicle for personal trips.
- Travel to a temporary work location within your metro area if you do not have a regular place of business.
Tip: To convert a portion of your otherwise nondeductible commute into deductible business travel, consider making a business-related stop, such as the bank or post office, on your way to your regular place of business.
Business Vehicles and 100% Accelerated Depreciation
Some vehicles used in your business may qualify for an immediate write-off on your federal taxes of up to 100% in the first year you acquire the vehicle. Trucks or vans that do not fall under the definition of passenger automobiles are not subject to depreciation limits and currently qualify for 100% bonus depreciation. A truck or van falls under this definition ONLY if the gross vehicle weight is 6,000 pounds or less. Gross vehicle weight for a truck or van means the maximum weight rating for a loaded vehicle.
Certain special-use vehicles are excluded from the definition of passenger automobiles, regardless of their weight rating. These vehicles may include:
- Specially modified trucks or vans (a plumber’s truck, for example)
Current requirements dictate that these vehicles must have been acquired and placed in service between September 28, 2017, and December 31, 2022. The accelerated depreciation amounts are scheduled to drop to:
- 80% in 2023
- 60% in 2024
- 40% in 2025
- 20% in 2026
It is important to remember that the 100% write-off may not be allowed on your state income tax return. Some states follow the federal guidelines, but others do not.
Documentation Requirements (and how to make it easy)
Taxpayers must maintain adequate records supporting the business portion of vehicle use. IRC Sec. 274(d) generally disallows any deduction unless the taxpayer can substantiate by adequate records or sufficient evidence the:
- amount of an expenditure (mileage for vehicles),
- time and place of business,
- business purpose and,
- business relationship.
Failure to comply with this requirement can result in loss of the deduction. The evidence should be detailed and provide more than just the monthly beginning and ending milage noted in your records. Sample vehicle log templates can be found online, or we can help you come with a log that suits your needs. A detailed vehicle mileage log may look like this:
Another way to easily track mileage is with your smart phone. Numerous mileage apps are available that use your phones GPS and map apps to help you track and log your business mileage. Just search “mileage tracker” in your app store and see which one might be right for you.
Contact the professionals at Gilliam Bell Moser LLP for additional information.