As a business owner, you’re probably well aware of the fact that you only pay taxes on your net income which means you can write off some of the expenses that occur in your everyday life. If you need a vehicle for business purposes (and, as car-based as life is in California, nearly every business owner needs a car), then you can write off a portion of the expenses related to owning the car.
But how do you determine how much of your vehicle expenses are eligible to be deducted against your business income and how do you calculate the deduction?
You have two options when it comes to calculating your car expenses – you can either use the actual expense method or the mileage rate.
So, what is the best method for deducting vehicle expenses in CA? Well, it kind of depends. Read on to find out more.
What counts as a business mile?
Regardless of which type of expense calculation you decide to use, you need to start by calculating your business mileage for the year. Business mileage includes any time you drive from one workplace to another. If your primary work location is your home, then driving from your home to a client site would count as business mileage. If your business includes a physical location but your primary work location is your home, the mileage you rack up driving to the office would also count.
If you meet clients for business meals or run out to the store to get office supplies, those miles also count as business miles.
In order to justify your business mileage expense, you should keep a log of your mileage including the date of the trip, purpose, and destination. If you met with a client, you should note that as well.
How do you calculate the vehicle expense using the mileage method?
The mileage method (once you’ve calculated your business mileage) is the easier method for calculating your business vehicle expense. You take your total business mileage for the year and multiply it by the standard mileage rate to get your total deduction.
California adheres to the federal mileage rate which is 58.5 cents per mile for 2022. As you can see, the expense adds up very quickly with every 10-mile trip giving you a $5.85 deduction against your taxable income.
But once you’ve calculated your mileage deduction, you can’t take any additional expenses against your vehicle. The 58.5 cents per mileage is supposed to cover all of your expenses including gas, repairs, and maintenance. So, what if your expenses are more than 58.5 cents per mile? Then you need to consider using the actual expense method.
How do you calculate the vehicle expense using the actual expense method?
With gas over $5/gallon in many parts of California, it’s very likely that the federal mileage rate will not cover all of your vehicle expenses.
Under the actual expense method, you take your percentage of business vehicle use for the year and multiply that percent by your total expenses. The business usage percent is calculated by the business mileage divided by the total mileage.
Your total vehicle expenses include the following:
- DMV registration fees
- Interest paid on the purchase of a vehicle
- Lease payments
- Maintenance (carwashes, detailing, replacement parts)
- Depreciation on a purchased vehicle*
*Depreciation of a vehicle varies by several factors including the purchase price of the vehicle, federal/state rules which change annually, and the weight of the vehicle. For example, the entire purchase price of a heavy vehicle (over 6,000 pounds) can be written off in the first year for federal purposes, whereas a small sedan can take a maximum of $18,200 for federal purposes in 2021 and $5,600 for California. Because the rules change each year, you should check with your tax advisor if you’re considering the purchase of a new business vehicle.
Once you’ve added up your total vehicle expenses, you take the total and multiply it by the business use percentage. As you can see, this method requires maintaining more records but often results in a higher deduction.
Can you switch between methods?
For each vehicle, you need to choose one method of calculating your expenses for the year. However, if your business owns multiple vehicles, you can choose which method to use for each vehicle.
Once you have used the actual expense method for a vehicle, you can never use the mileage method for the vehicle. So, you should consider your long-term plans prior to opting for the actual expense method.
Interested in learning more about taxes? The websites below are a good place to start.
So, as you can see, the best method for deducting vehicle expenses in CA really depends on the situation. Why do we know so much on the topic? We’re My OC Bookkeeper, Southern California’s premier bookkeeping, accounting, and outsourced CFO firm. We help businesses all over SoCal tackle all kinds of challenges so if you have some, reach out to us today. Click on the surfers to learn more!