Originally published on February 11, 2011.
Being a small business owner has a lot of advantages, but a company car or a large car allowance probably isn’t one of them. If you’re using a car for business purposes, you’ll be able to claim at least a portion of it on your taxes.
This article will help you understand how to calculate the different types of vehicle expenses and write off the proper deductions.
Business or personal…or both?
If your car is used exclusively for business, it’s rather straightforward. You simply take the total of the vehicle expenses and attribute them to the business when filing your taxes.
However, most small business owners split their vehicle time between business and personal uses. In this case, things get a little more complex. There are two ways to deduct vehicle expenses in this situation, and for both of them you need to track your mileage usage.
1. Deductions per distance
The first method is fairly straightforward. For every mile or kilometre that you drive you get a specific amount of a deduction. This rate changes regularly to account for inflation (and it different for the U.S. and Canada) 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 1,000 miles for business and the rate is $0.55 per mile. You would be eligible for a deduction of $550 for the year.
2. Deductions per percentage of business use
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 were 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.
Vehicle expenses you can claim
Here’s a list of the expenses you can claim as deductions:
- 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’re aware of the rules that apply to your situation and chat with your accountant to help you handle your vehicle expenses so you’re all prepared for your tax filing.
The information and tips we’re sharing in this article are meant to be a starting point for your year-end tax prep, so you can be informed and feel confident when working with your accountant. Be sure to check with a tax expert in your country or region for any specific advice you need, as each business (and tax district) is different. As our lawyers would say: “This article is for informational purposes only. It should not be considered legal or financial advice.”