If employees are using vehicles for your business, you’ll need to make sure you have all the right documentation. Otherwise, you could end up paying tax penalties or even be in violation of the law.
However, the documentation requirements for business use of vehicles can seem complex and confusing. We’ve put together this guide to make things easier for you.
Wondering how to properly document the business use of vehicles for tax purposes? Read on to learn more!
How to Document Business Use of Vehicles
There are a few different things you’ll need to keep track of when your employees use your vehicles. Here is a list of all the things you should track, and how to properly document the information.
What are Business Vehicles?
Not all types of vehicles will qualify for these deductions.
Business vehicles include cars and trucks that are used for business purposes.
However, equipment vehicles don’t qualify as business vehicles. For example, if your company buys a dump truck, this is different. Vehicles for hire, like transport vans and taxis, also don’t count.
Now, how will you document those vehicles that qualify? Let’s take a closer look.
1. Keep Careful Records
First and foremost, it’s critical that you keep detailed records of your vehicles and anything you’ll write off for your business. If you are going to deduct anything, you’ll need to save receipts and keep a log of miles and any expenses you plan to write off.
You can get a vehicle expense log at most office supply stores. However, there are also apps that make it easy to track miles and other expenses.
2. Decide if You’ll Use the Standard Mileage Rate
If your business vehicle runs economically, the standard mileage rate is usually the best deduction. However, if your vehicle costs more to run and maintain, you might want to use the actual cost method instead.
3. Deduct Depreciation
You can also deduct for depreciation of a vehicle over time. If you use the standard mileage rate, depreciation is included, but if you use the actual cost method, you’ll need to calculate depreciation separately.
Depreciation accumulates gradually based on a vehicle’s mileage, so that’s another reason to keep careful records.
4. Consider Ownership
Usually, the business owns the vehicle, and employees simply use it. However, if an employee is using their own vehicle for business purposes, the approach to documentation is slightly different.
The employee using their own vehicle will need to send a request for reimbursement to the business. Then, the company will deduct the expenses that were paid based on employee documentation. The employee will not be taxed on the amount of this reimbursement.
Need Help Documenting Business Use of Vehicles?
Although this overview will get you started, there is much more to know about documenting the business use of vehicles.
Things change if the vehicle is owned versus if it’s leased, for example. Calculating actual vehicle expenses can also get complicated since there are so many factors to consider.
Need help getting ready for the tax season and all the documentation that comes with it? Contact us today.
About the Author:
Chris Duncan, CPA
As a South Carolina native, Chris has spent the better part of his life in the Charleston area. Chris graduated from The Citadel with a degree in Business Administration (Accounting Concentration) in 1999. In 2006, Chris launched his own CPA firm. For the past twelve years, Chris has worked as a local CPA and provided services to both individuals and commercial clients in a variety of industries to include accounting, bookkeeping, tax, and payroll service