Automobile expenses are handled differently depending on whether a vehicle is owned by the business or by you personally.
If a vehicle is owned by your small business, most of the expenses associated with it will be deductible. Fuel, maintenance, repairs, insurance, license and registration will all be deductible. When the IRS allows you to deduct all of these expenses, they want to make sure you’re using the car only for business purposes. They will specifically ask if you have a separate vehicle to use for your personal transportation needs. If you use the vehicle predominantly for business, but occasionally for personal transportation, you will have to document what percentage of use is business and what percentage of use is personal. Keep a mileage log to document this. You will be allowed to deduct only that percentage of expenses that matches with what you can prove was the percent of business use of the vehicle. If you use it 90% of the time for business, you are allowed to deduct 90% of the expenses.
If you are a business owner and use your personal vehicle for business purposes, none of the regular expenses of vehicle ownership are deductible. You will pay for fuel, maintenance, repairs, insurance, license and registration from your own personal funds. Then you can reimburse yourself for mileage actually driven for business purposes. It is imperative that you keep a written log to document business miles driven in order to count this as an expense for your business. The IRS sets mileage reimbursement rates. The current rate is $0.575 per mile. So if I drive 10 miles for business, I have essentially contributed $5.75 to my business, and can deduct $5.75 as a business expense. The key here is to keep “contemporaneous” records of the date, odometer readings, and where you are traveling to and from. The IRS prefers “contemporaneous” records meaning you write them down at the time it is happening rather than trying to reconstruct what happened after the fact. I advise clients to keep a pocket size notebook in their car to record this information with every trip.
One other tidbit to keep in mind when you are documenting business mileage is that commuting does not count as business mileage. If you have a home office, and no business location other than your home office, business mileage is easy to understand. Once you have a business location other than a home office, you can only count business travel to and from the business location as business mileage. Traveling from your home to your business location doesn’t count: it’s commuting. Traveling from your home to a client’s office similarly doesn’t count. The IRS considers that commuting, too. If you travel from your home, to your office, then to the client’s office, you can count only the travel from your office to the client’s office as business mileage. Travel from one business location to another is OK to count as business travel. For example, traveling from one client’s office to another client’s office counts as business travel.
The main take-away for business owners is that automobile deductions are vastly different depending on who owns the vehicle.