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Automobile Expenses

Automobile expenses can represent a significant portion of a taxpayer’s costs, especially for those using their vehicles for business, medical, charitable, or moving purposes. The Internal Revenue Service (IRS) allows for the deduction of these expenses under certain conditions. Understanding the rules and methods for deducting automobile expenses is crucial for taxpayers to ensure compliance and maximize their deductions.  It can also minimize the assessment of an accuracy-related penalty (negligence) for claiming an expense that is either overstated, or unallowable.

From my many years inside the IRS, the issue of an erroneous deduction of auto expense was present in a significant number of audits.  This was especially true when employees were permitted to take an expense for the use of their personal vehicle for their employer.  The Tax Cuts and Jobs Act passed in 2017 eliminated the category of unreimbursed employee business expenses (formerly, a miscellaneous itemized deduction), and so this type of expense is only relevant to business returns as well as individual Schedule Cs.

The following information relates primarily to federal returns.  However, some states (like California) did not follow (conform with) all the changes made by the Tax Cuts and Jobs Act.   For example, in California, employees can still claim unreimbursed employee expenses if they qualify, maintained adequate records,  and itemize their deductions.  So, if you are an employee using your vehicle in your job and you have a state income tax, be sure to check with your state’s tax agency concerning its rules regarding deducting automobile expenses for employees.

ELIGIBILITY for DEDUCTION
Business Use
Taxpayers can deduct automobile expenses if they use their vehicle for business purposes. This includes driving to meet clients or vendors, attending business meetings away from the regular workplace, or traveling to a temporary work location. Commuting costs between a taxpayer’s home and regular place of business are not deductible.  However, if an individual has a home-based business, and meets the requirements for deducting an office in the home, then he or she may qualify for taking a deduction for travel from the home office to the first business location, and from the last business location returning to the home office.

Medical Use
Automobile expenses incurred for medical purposes are deductible if they are primarily for and essential to medical care. This includes trips to doctors, hospitals, outpatient centers, pharmacies for prescriptions, or other medical facilities.

Charitable Use
If a taxpayer uses their vehicle for charitable activities, they can deduct these expenses. This involves driving to perform services for a qualified charitable organization.  For example, a church member could use their vehicle to transport other church members to church functions.

Moving Expenses
Members of the Armed Forces on active duty who move due to a military order related to a permanent change of station may deduct moving-related automobile expenses.  Before 2018, taxpayers moving for work reasons could claim a deduction if they met the distance tests.

Methods for Deduction
The IRS provides two methods for calculating automobile expense deductions: the Standard Mileage Rate and the Actual Expense Method. Taxpayers can choose the method that results in a larger deduction but must stick with the chosen method for the vehicle’s life unless they qualify for a change.  In my experience, the majority of taxpayers use the Standard Mileage Rate as it requires less recordkeeping.

Standard Mileage Rate
The Standard Mileage Rate is a simplified method where taxpayers multiply the number of business miles driven by a standard rate set by the IRS. The rate is usually changed annually.  For 2024, the rate is 67 cents per business mile (up from 2023’s 65.5 cents per mile), 21 cents per mile (down from 2023’s 22 cents per mile) for medical or moving purposes, and 14 cents per mile (unchanged) for charitable activities.

Requirements for Standard Mileage Rate

  • Ownership or Lease: The vehicle must be owned or leased by the taxpayer.
  • Consistent Use: The taxpayer must not have previously claimed accelerated depreciation or used the Actual Expense Method for the vehicle.
  • Documentation: Accurate records of miles driven, purpose, and dates of travel must be maintained.  A log of daily use should be maintained.  There are apps that can be used to record daily business trips.  In addition to recording daily usage, recording the odometer readings at the beginning and the end of the tax year is required.  Keep auto service records as they usually have the odometer reading printed along with the date of service.

Actual Expense Method
The Actual Expense Method involves deducting the actual costs incurred in operating the vehicle. This includes gas, oil, repairs, tires, insurance, registration fees, licenses, and depreciation (if owned) or lease payments (if leased).

Requirements for Actual Expense Method

  • Detailed Records: Taxpayers must keep detailed receipts and records of all expenses. This is the main reason why most taxpayers opt for the standard mileage rate.
  • Business Use Percentage: Only the business portion of the expenses is deductible, which requires calculating the percentage of total miles driven for business purposes.  That percentage is determined by dividing the business miles driven by the total miles driven for the year.

Record-Keeping Requirements
Regardless of the method chosen, meticulous record-keeping is essential. Taxpayers should maintain a mileage log that includes:

  • Date: The date of each trip.
  • Purpose: The purpose of the trip (e.g., client meeting, medical visit, charitable service).
  • Destination: The starting point and the destination of the trip.
  • Odometer Readings: The beginning and ending odometer readings for each trip.
  • Total Miles: The total number of miles driven (difference between the odometer readings).

Reporting Automobile Expenses
Automobile expenses are reported on different forms depending on the nature of the use:

  • Business Use: Schedule C (Form 1040) for self-employed individuals.  For state returns that still permit unreimbursed employee expenses, the IRS form 2106 is usually required.  Corporations and partnerships (for their company-owned or leased vehicles) will report the expenses on their respective returns.  
  • Medical Use: Schedule A (Form 1040) as an itemized deduction.
  • Charitable Use: Schedule A (Form 1040) as an itemized deduction.
  • Moving Expenses: Form 3903 for eligible moving expenses (for now, limited to military personnel).

Limitations and Considerations
Depreciation Limits
There are limits on the amount of depreciation that can be claimed for vehicles. The IRS imposes luxury automobile limits, which cap the depreciation deduction for vehicles exceeding certain value thresholds.  This prevents a taxpayer from buying a Rolls Royce and having the government subsidize its cost through a tax deduction.  Expenses must meet the “ordinary and necessary” standard, as well as be reasonable in amount.

Personal Use
Expenses related to personal use of the vehicle are never deductible. Taxpayers must clearly distinguish between personal and eligible use.

Switching Methods
Switching from the Standard Mileage Rate to the Actual Expense Method in subsequent years is allowed, but switching from the Actual Expense Method to the Standard Mileage Rate is not permitted.

Conclusion
Deducting automobile expenses on a federal tax return requires understanding eligibility, choosing the appropriate deduction method, and maintaining accurate records. By adhering to IRS guidelines and keeping meticulous documentation, taxpayers can ensure compliance and potentially reduce their taxable income through legitimate deductions.