Is Gas Deductible From Your Taxes?
Are you self-employed or a freelancer and use your car for business purposes at some time? If so, the business use of your car can be one of the largest tax deductions you can take to reduce your business income (use our self-employment tax calculator first to find out how much you'll owe on your tax bill).
Car expenses such as gas, auto insurance, and maintenance are the most powerful and beneficial tax deductions -yet many people neglect to track car expenses and pay more taxes than they need. Whether you’re buying a car under a business name or using your personal vehicle, you’ll be able to deduct the expenses related to the business use of your car. Particularly, you can either take a mileage deduction for any business use or itemize your expense and calculate the percentage of those expenses for business vs personal use.
I'll be your designated tax expert and walk you through how you can use Schedule C to claim this deduction. Before we get into if gas is a tax write-off, I have to explain some tax laws first. There are two methods of calculating the business use of your car - Actual Expense Method vs Standard Mileage Method. If you qualify to use both methods, you’d better calculate your car-related expenses both way and then choose the method that generates the biggest tax break.
Actual Expense Method
The Actual Expense method is based on the actual vehicle expenses you spend during the operation of your car. It includes:
- oil changes
- repairs and maintenance
- car tires
- car registration and license fees
- car washes
Note: Other car expenses for parking fees, registration fees and tolls attributable to business use travel expenses are separately tax-deductible, whether you use the standard milage rate or actual expenses.
If you use your car only for business purposes, you can deduct the entire actual cost of operation. If not, however, you must determine what it actually costs to operate the car for the portion of the overall use of the car that’s business use – expenses attributable to the portion of the total miles driven that are business miles. For example, if the following actual expenses are used, and you drove 5,000 miles for business use vs 10,000 miles for the year, your deduction would be ($5,300 x .50 = $2,650).
- $2,000 fuel
- $3,000 insurance
- $100 oil change
- $3,000 car mortgage payment
- $200 car wash
Make sure you don’t include your car’s mortgage payment – even if your vehicle was purchased using your company name, only interest expense can be claimed as business expenses.
Standard Mileage Method
The other method you can use to calculate the business use of your car is called the Standard Mileage deduction. You can deduct car expenses based on the number of miles driven at the published IRS rate, which is updated annual. For the current standard mileage rate, refer to Publication 463, Business Travel, Entertainment, Gift, and Car Expenses or search standard mileage rates on IRS.gov.
If you are self-employed and claim a home office for work or space dedicated exclusively for business—all the driving you do from your home to clients’ offices is a tax write-off. Otherwise, commuting back and forth for work has never been a tax deductible expense.
To use the standard mileage rate, you must own or lease the car and:
- You must not operate five or more cars at the same time, as in a fleet operation,
- You must not have claimed a depreciation deduction for the car using any method other than straight-line,
- You must not have claimed a Section 179 deduction on the car,
- You must not have claimed the special depreciation allowance on the car, and
- You must not have claimed actual expenses after 1997 for a car you lease.
To use the standard mileage rate for a car you own, you must choose to use it in the first year the car is available for use in your business. Then, in later years, you can choose to use the standard mileage rate or switch to actual expenses.
For a car you lease, you must use the standard mileage rate method for the entire lease period (including renewals) if you choose the standard mileage rate. We recommend tracking your miles for taxes if your business relies heavily on commuting or driving.
Here's how it works.
Check the odometer reading at the start and end of the year, then divide the total miles you drove into your work mileage.
For tax year 2020, the amount per mile is 57.5 cents per mile. If you drove 5,000 miles for business purposes for 2020 year, the deduction will be $2,875 (5,000 miles X $0.575 = $2,875). If you compare with the number ($2,650) using Actual Expenses method above, you’re better off using Standard Mileage method by $225. If your marginal tax rate is 24%, you could save your taxes about $54 by using Standard Mileage method.
Be sure to keep all you receipts whether you use either methods so you can calculate the deduction both ways for the most benefits.
Business-owned car vs personal car
If you purchase a vehicle through your business, you may be eligible to claim a substantial deduction each year based on the depreciation of the vehicle. Under the Tax Cuts and Jobs Act, business owners who use their car specifically for business use, can get bonuses, as long as the vehicle was placed in service between September 28, 2017 and December 31, 2026. Additionally, the Section 179 deduction up to $25,000 can also be applied to a qualifying SUV or pickup. Generally, having the business own the car allows more deductions because the company can deduct both depreciation expenses and general auto expenses like gas, tires, and maintenance.
When insurance comes into play, the plan can be changed, though. Insurance for a company-owned vehicle tends to be more expensive than a personal vehicle. If an employee uses their car for business purposes and they’re reimbursed by the company for expense, however, a personal coverage may not cover any business any damage that’s incurred for business activities. You should juggle the cost and benefits to determine who would own a vehicle for company use.
Self-employed vs Employee
If you’re a sole proprietor, it is straightforward to claim car expenses. However, if your business have your employees to use their own cars or your company cars, you have to reimburse your employees and have a solid plan in place to track their expenditures and mileages. Prior to 2018 tax year, employees were allowed to deduct unreimbursed expenses that exceed 2 percent of their adjusted gross income if they itemized deductions on their returns. Those could include either mileage or actual expenses. As of 2018 tax year, however, that option is not available any longer.
Generally speaking, if you drive a lot of miles and have a fuel-efficient vehicle, the Standard Mileage method will do better than the Actual Expense method. If you drive fewer miles in a car that has a low miles-per-gallon, and you spend relatively high costs for maintenance, insurance and lease payments, claiming actual expenses may work out better. In either case, tracking business mileage, credit card statements, and expenses are the key to claim the most beneficial deduction for the year. If you need any help filling out your tax forms, contact a tax professional. Good luck during tax time!