Owning and operating a vehicle is expensive at the best of times. If you are a small business owner looking to save some money, using your personal vehicle for business purposes may be an instant cost saving.
The IRS classifies “business use of a car” as travel between two destinations, one of which may include your regular place of business.
Whether you are an independent contractor using your car to get to client meetings or you use your vehicle for deliveries, you will need to understand the regulatory ramifications (and benefits) of using your personal vehicle for business purposes.
Below is an overview of some of the key considerations that you will need to bear in mind as you drive around doing business in your personal car, truck or van.
1. Auto Insurance – Does your Policy Cover Professional Business Use?
If, as a small business owner, you use your vehicle for any purpose other than driving to and from work or other personal use, you should check your existing insurance policy documents to see if you need a commercial auto policy or require your existing personal auto policy to be endorsed to cover your specific business use. For example, if you are involved in any kind of food delivery service, catering, landscaping services, or operate a day-care or church van service, you are well advised to do some simple research before you use your personal vehicle.
Talk to an insurance agent if you are unclear and consult these small business insurance resources from the government to help you make informed decisions when buying vehicle and other small business insurance policies.
2. Understanding Tax Deductions: Personal Vehicles Use vs. Business Vehicle Use
There are basically two fundamental tax breaks for business owners who use vehicles for business purposes, but be sure you are aware of which one applies to using your personal vehicle for business:
a) Actual Vehicle Expenses – If a vehicle is used exclusively for business purposes, you can typically deduct the full cost of operating the vehicle. For more information on how you can claim the actual vehicle expenses deduction, refer to this Business Use of Vehicles overview from Turbo Tax.
b) Standard Mileage Rate – If you use a vehicle for business on a part-time basis, i.e. your personal auto, then you must divide your expenses (in the first year that you begin using it with your business) based on actual mileage. The IRS 2009 optional standard mileage rates is used to calculate the deductible costs of operating an automobile for business or non-profit use and is currently set at 55 cents per mile. Get more information from the IRS on mileage rate deductions here.
In addition to basic mileage, you can also deduct interest on an auto loan, registration and property tax fees, and parking and tolls, as long as you can prove that they are business expenses. As with all business tax preparation, be sure to keep good records by keeping a detailed log of all your business miles, receipts and other documents.
For more general information about which business expenses qualify as tax deductions, refer to this Small Business Expenses and Tax Deductions Guide from Business.gov, which also provides links to resources that provide clear guidance on deducting and capitalizing your expenses.
3. Personal Property Tax and Part-time Business Vehicle Use
Many states require vehicle owners to pay property tax on vehicles used for personal use. Some states, such as Virginia, also provide tax relief for vehicles that are used predominantly for non-business purposes. If you are in doubt as to how part-time business use of your personal vehicle affects your property taxes talk to your state’s revenue office – and remember, the IRS does let you deduct property tax fees as a business expense.
- Small Business Tax Guide (Business.gov) – Unique because it brings together small business resources from across many disparate government Web sites and presents it in an easy-to-digest manner. Includes advice on everything from deductions to employment taxes to collecting sales taxes.
- Free Small Business Tax Advice from Uncle Sam (Allbusiness.com)
- Tax Law Changes for 2009: What’s New for Your Small Business (Allbusiness.com)
- Tax Deduction 101 for Small Businesses (Allbusiness.com)
- Who Should Own the Business Car? (Inc.com)
- How to Advertise Your Business Using Your Car (eHow.com)