Being a small business owner has a lot of advantages, but a company car or a large car allowance is not likely one of them. You are probably using your own vehicle for both personal and business purposes. If that's the case you need to know how to properly handle your vehicle expenses for your business so that you can write off the correct expenses and lower your taxable income.
If your car is used exclusively for business this is easy: You simply take the total of the vehicle expenses and attribute them to the business. In Wave it is simply a matter of dragging them to vehicle expense category for your business.
However, most small business owners share the use of their vehicle between business use and personal use. In this case things become a little more complex. There are two accepted ways to deduct vehicle expenses in this situation; for both of them need you to track the mileage usage of your vehicle.
The first method is fairly straightforward. For every mile or kilometer that you drive you get a specific amount of a deduction. This rate changes regularly to account for inflation so you should always check with your accountant to see what rules are in effect for you.
For illustration purposes, let's say you drove your vehicle for business for 1,000 miles and the rate is $0.55 per mile. You would be eligible for a deduction of $550 for the year. To claim this in Wave you would have to make a Journal Entry applying the $550 to vehicle expenses and offsetting it with $550 to owner investment (or shareholder loan if it is a corporation).
The second method for handling your business/personal vehicle expenses is to add up your mileage for business and divide it by the total amount of mileage on the vehicle for the year. That gives you the percentage of the vehicle expenses that can be claimed. For example, if you drove your car 10,000 miles in the year and 6,000 was for business, you can likely claim 60% of your vehicle costs for the year as business expenses.
Applying this percentage to every expense you incur over the course of the year can be a pain. So a better way to do it is this: For any type expense that is x% personal and y% business, put the entire expense, all year long, into EITHER the personal OR the business expense category. Then, at the end of the year, take the total of that category and apply the appropriate percentages (using a Journal Entry for your business, and Quick Entry expenses on your personal side).
What vehicle expenses can you claim? The types of expenses that should be included are:
- other regular operating costs
- if you own your car you should also deduct interest payments on car loans and depreciation
- if you lease your vehicle, you can deduct the lease payments.
As always, different rules apply to each jurisdictions, and this is one area where rules change frequently. Make sure that you are aware of the rules that apply to your situation and invite your accountant into Wave to help you handle your vehicle expenses so that you are getting the largest tax deduction possible.
Wave Accounting provides this information as a guide to get you started. When it comes to actually reporting financial details to the government, you should check with your accountant or reference the rules in your jurisdiction to see how they apply to your unique situation.