Can car repairs be considered a deduction on your taxes? The straightforward answer to this question is YES. If you are using your vehicle for business, you may be eligible to claim tax deductions. However, this is subject to certain rules.
Tax season can be stressful for many taxpayers, especially with all the economic struggles the global market has faced this year. Fortunately, you might be able to cut your tax bill from your car expenses and repairs.
Who are eligible for tax deduction from their car repairs and expenses?
According to the Internal Revenue Service (IRS), you are eligible for this tax deduction if you are a business owner or self-employed. If you use your car for both personal and business purposes, the expenses should be split. The portion of mileage used for business will be the basis of the deduction.
Majority of the employees who use their vehicle for work are no longer eligible for the business expense deduction; although some employees may still deduct travel costs which were not reimbursed. These include military reservists, qualified entertainers or performing artists, and fee-basis government officials, who use a car for business purposes. This is effective for tax years after December 2017.
Car Expenses: The Basic Rules
Tax terms and guidelines are often confusing for most taxpayers. Making sure you understand the basics ensures that you don't waste time trying to search for answers to the many mind boggling questions you have.
To make sure you’re on the right track when claiming tax deduction for car expenses, keep these basic rules in mind. You can only claim expenses:
- That you incurred for business purposes
- That you covered for yourself
- That you have not been previously reimbursed
For this reason, it is very important to keep a logbook of expenses, separating the business and private use of your vehicle.
Moreover, you are eligible to claim car expenses if you use your own car in the course of performing business or work-related purposes.
What car expenses are tax deductible?
Many of your expenses to keep your car running and in good condition are currently deductible. The typical expenses eligible for tax deduction include the following:
- Tolls and parking fees
- Gas and oil
- Car insurance
- Garage rent
- Depreciation (For business owners, this means deducting purchases used to make income for their business over time such as property and equipment. Depreciation expense for assets can be calculated every year.)
- Licenses and registration fees
- Car repairs
What car repairs are eligible for tax deductions?
Generally, a repair does not make your vehicle better than it was in the past. In other words, doing a car repair should not be mistaken for doing car improvements. Repairs generally consist of minor fixes to your vehicle, such as replacing a broken tail light or fixing faulty brakes.
Car repairs are currently deductible within the full year they were done. A repair is essential in keeping your car in a safe and efficient operating condition. Routine car maintenance is also currently deductible. This involves inspecting coolant levels, tire pressure and depth, air filters, headlights, signals, parking lights, brakes, oil levels, wax vehicle, transmission fluids, shocks and struts, transfer case fluid, battery, and windshield wipers.
Are car improvements tax deductible?
Unfortunately, car improvements are not currently deductible for business owners. Determining the difference between car repair and improvements can sometimes be tricky. Some ways to distinguish car improvements include:
- Materially adding value to the vehicle
- Adapting the property the vehicle to a new use
- Physically enlarging the car
- Replacing a major component
- Curing a defect in the vehicle that existed before it was acquired
- Rebuilding a car to make it look like new
Actual Expenses Method vs Standard Mileage Method
In order to claim tax deduction from your vehicle expenses, the IRS offers two methods to calculate the cost of using your car for your business: the Actual Expenses Method and the Standard Mileage Method.
As with any other comparisons, there are pros and cons for each. Depending on your type of business, one method would probably be more beneficial for you. Let us have a walk through these two ways.
Actual Expenses Method
The actual expenses of your vehicle pertains to the total amount you spend on repairs and other costs associated with using your car for your business.
The Actual Expenses Method requires you to sum up all the amount you actually spend in using your vehicle. Then, you have to multiply this figure by the percentage of the car's business use.
For example, if you use your vehicle half the time for business and the other half for personal matters, you should multiply your total vehicle expenses by 50 per cent to arrive at the business portion (e.g. $10000 total expenses x .50 business use = $5,000 business expenses). The remaining amount is non-deductible, as it is considered a personal expense. You may be able to deduct the cost of parts and depreciate the cost of tools if you make the repair car yourself. But, this is excluding the cost of your labor.
In computing your total expenses you can include the amount you spend on lease payments, insurance, gas, maintenance and check-ups, tires, license, and vehicle depreciation. To calculate the vehicle depreciation, you have to use a depreciation table to determine the correct amount, then subtract the portion of expenses that applies to the business use of your car. It is also essential to note that due to the annual depreciation limits, it can take many years to fully depreciate a car.
If a car is exclusively used for business, actual expenses can all be written off.
It is very important that you keep a copy of all the receipts, invoices, and other documentation to support your claim. Without these, the IRS may not credit these expenses when you make your tax deduction claim. Because of this, most businesses use a single bank account to keep all their business records intact.
Keeping a logbook for your business is also very essential. Nothing will inspire you to keep a logbook like knowing how much your car expenses can add up throughout the course of a year.
Standard Mileage Method
The Standard Mileage method is a more straightforward and easier way of calculating the business use of your vehicle. You do not have to keep a record of individual purchases and save receipts. Instead, you simply keep track of your total mileage for the tax year. A top tip would be to take a photo of your car’s odometer at the beginning of the tax year, so you have a clear evidence of where your mileage stood at the start of the year.
As with the Actual Expenses Method, you must determine the percentage of vehicle use that applies to your business, only this time you determine it through mileage.
If three quarters of the miles you drive is for business and the other quarter is for personal use, you will multiply your total mileage by 75% to arrive at the business portion (e.g. 10,000 miles x .75 business use = 7,500 business miles).
Once you have determined the total business mileage for the year, simply multiply that number by the Standard Mileage rate. The Standard Mileage rate for tax year 2020 is 57.5 cents/mile.
If you choose to use the Standard Mileage deduction, you cannot deduct individual repair or maintenance expenses for your car. If a major part of your car broke down and needed replacement, you might be better off using the Actual Expense method to take advantage of this large expense. Car repairs can be considered a deduction on your taxes.
Here are some important guidelines for using the Standard Mileage Method:
- You must own or lease the vehicle. You can’t claim a deduction if you use your friend’s or family member’s car.
- You can only use a straight-line depreciation deduction on the vehicle.
- You cannot operate a fleet of five or more vehicles.
- 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
If you are leasing a car, you must use the standard mileage rate method for the entire lease period.
For filing a claim for credit or refund, you are allowed to make a claim within 3 years from the original date when you filed the original return or 2 years from the date the tax was paid.
As with the examples shown above, the method you use to calculate the business use of your car can have a massive impact on your total business expense and your tax burden. It is vital to keep complete records so you can compute your deduction using both methods. Then you can choose which one saves the most amount of money.
Top Tips in Keeping Good Records of Your Car Expenses
As discussed above, keeping a neat and accurate record of your car expenses is very essential in calculating your tax deductions. Good record-keeping is a vital part of running a successful business. Accurate and well-organized records make it easier to prepare your accounts at the end of the year when you pay your taxes. It can also help you monitor your business' cash flow and make sure that you are tax-efficient.
To help you with your record keeping, consider these helpful tips:
- Use a spreadsheet to record all your expenses. Excel is fine for this, or you can use other tried and tested accounting software. Good record management is equal to less tax time stress.
- Know exactly what you need to record. It is also a good habit to record everything in real-time, particularly expenses which can very easily slip through the net.
- Always get a receipt. Make it a habit to ask for a receipt whenever you make a purchase – big or small.
- Scan your receipts and back them up online. Keeping small paper receipts can lead to a massive amount of paper load. They can also get lost really too.
- If using a scanner is much of a job for you, you can get a quick snap of your receipts through your smartphone. You can store the digital copies in Google Drive or Dropbox.
- Use an app to record your business mileage expenses.
- Keeping a diary can be useful. A diary can be handy expenses record and it can also provide non-financial confirmation of business activities which can be useful in the event of a tax investigation.
- If you pay expenses through your credit card, it is helpful to annotate credit card statements with a description of each expense.
- Separate your business and personal finances. Treat your business as a separate entity, whether it is big or small. It is also a good idea to open a separate bank account for your business funds and to use this solely for business expenses.
Conclusion on If Car Repairs Be Considered a Deduction on Your Taxes
Car repairs and expenses can be considered a deduction on your taxes. However, this is only applicable to business owners and if you are using your vehicle for business purposes. The IRS offers two methods to calculate tax deduction claims: the Actual Expense Method and the Standard Mileage Method. Depending on the nature of your business and the amount of expenses you have for your vehicle, one method may be better than the other. In order to make the most of your tax deduction claim, you should have kept a good and accurate record of your receipts and invoices as it is required when processing the claim. Several car repairs and expenses can be considered for tax deduction, so it would certainly ease the tax burden for business car owners.