As an entrepreneur, you may have been informed about the possibility of deducting vehicle expenses through your business. However, the application of this deduction is not as straightforward as it may initially seem. Our team at Collective is dedicated to providing a comprehensive understanding of the process, ensuring that your accounting remains unambiguous and in accordance with IRS guidelines, offering you peace of mind.
Collective's default policy is to recommend members track and deduct their business mileage rate as their primary vehicle expense, in order to accurately reflect the cost of using their vehicle for business purposes.
Let's talk about how to recognize the business miles driven on your vehicle by using the standard mileage rate and how we will capture it on your Profit and Loss Statement to increase your S Corps expenses.
Tracking business miles
Most of our solo entrepreneur members work from home, or a co working space, and sometimes use their vehicle to travel to appointments or work related activities.
The vast majority of members at Collective should not track gas, maintenance, repair, lease, and loan expenses related to their vehicle. Instead, you’ll track business miles driven and multiply it by the annual IRS mileage reimbursement rate.
When using the standard mileage method, the IRS lets you count 4 things as deductions:
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Mileage ($65.5 cents per mile as of 06/30/2023)
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Parking fees (not tickets)
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Toll fees
All expenses such as loan payments, repairs, maintenance, and gas should be paid for through your personal account. Parking and toll fees can be paid through your business account. We will capture the mileage reimbursement through our Accountable Plan.
What if my previous accountant said I could deduct the full cost of my vehicle?
In rare cases, our members join Collective with a business vehicle that was depreciated using special or accelerated depreciation on a prior tax return. Collective reviews the prior tax return to check for this. These are the only circumstances where Collective would treat the vehicle as a true business vehicle. If this applies to you, then:
A) You should pay for all vehicle expenses from the company account like car payments, gas, and car repairs
B) We will need to collect the purchase agreement and loan statements related to the business vehicle.
Collective takes a conservative stance to protect our members on items the IRS commonly flags for audits. Cars are specifically called out to the IRS on tax returns and are a highly audited item. Also, tax and accounting advice changes once you become an S Corp.
Source: https://www.irs.gov/taxtopics/tc510
Disclaimer: The information contained in this document is provided for informational purposes only and should not be construed as financial or tax advice. It is not intended to be a substitute for obtaining accounting or other financial advice from an appropriate financial adviser or for the purpose of avoiding U.S. Federal, state or local tax payments and penalties.