For self-employed individuals and business owners, there are several days of the year when you drive a vehicle for business purposes. Actually, most professionals rely on this form of transportation nearly everyday to purchase supplies, meet with clients, and transport goods from production to consumers. In some cases, however, you may not own the car.
Whether it's a rental car for a weekend business trip or a leased vehicle, the lack of ownership may complicate your tax filing. Because of this, you may not be eligible to deduct mileage on your tax return. Well, you’ve asked and we’ve listened. Here is the full lowdown on driving a car for business purposes when you don’t own the vehicle.
The tax experts at MileIQ often get asked this question and the answer is always the same — it depends! Generally, you cannot deduct mileage without owning the vehicle. However, there are a few exceptions to consider. For example, if you are married to the owner of the car. In that case, you can absolutely deduct the amount of miles used for business purposes. Another scenario where you can deduct car-related expenses is if you lease a vehicle for business purposes. As a lessee you are entitled to the same deductions.
With this in mind, it’s important to note that taxpayers cannot deduct mileage unless the vehicle is used partially or fully for business needs. The IRS does not allow any taxpayer to deduct personal miles. For good measure, ask your tax professional before assuming any exceptions apply to you. They’ll quickly be able to confirm what’s best to do in your situation.
Your commute to and from work is rarely tax deductible, regardless of who owns the car. This is due to the IRS commuting rule that prohibits taxpayers from claiming mileage between their home and official place of work. Even taking a business call while on the way to work will not warrant a deductible. The only exception to the IRS commuting rule is a home office deduction. If you regularly use a home office to perform business operations, then you may qualify for this exception. Don’t forget that the IRS may want to see the hours logged at home. Therefore, it’s a good idea to maintain a calendar.
There are two methods for calculating a mileage deduction: the standard mileage rate and the actual expense method. In most cases, you can pick the deduction method of your choice. As long as you use the standard mileage rate for the first year of ownership, you are free to rotate between deduction types in the future. But what if you don’t own the car? Are you still able to choose the deduction method of your choice? Unfortunately, not owning a vehicle will impact the method you’re able to file with.
Let’s break down the different methods:
With the mileage deduction, eligible drivers can write off business miles using the standard mileage rate. For 2022, self-employed individuals and other qualified taxpayers can multiply 58.5 cents for every business mile driven. If you log a lot of miles on the road for business purposes, this deduction method will often provide the biggest savings.
On the other hand, deducting actual expenses could be more beneficial. Keep in mind, it requires a bit more work. You’ll need to keep track of all business expenses, including insurance, lease payments, car repairs, and more. If you’re interested in deducting lease payments, this is the right method to choose.
All in all, if you don’t own the car, you are restricted by which deduction method you can use. Whatever method you choose for the first year of leasing a vehicle, you must continue to use for tax purposes throughout the entire lease period.
Yes! When in doubt, always maintain records of your business expenses. To make the most of your tax bill, keeping a mileage log is the way to go. The IRS may have some exceptions to owning the vehicle, but they do expect the same documentation to back your business expenses. The same rules apply to leased vehicles. Although you don’t own the car, you must keep contemporaneous records of your daily drives to claim car-related expenses.
Nowadays, the best method for keeping track of business miles is with a mileage-tracking app. With this technology, you can automatically log all your business miles from start to finish without keeping a manual log of your odometer reading. In addition, you’ll have a digital report of all miles driven in the event the IRS audits you. You can sign up for MileIQ today and enjoy up to 40 free drives.