Court case clarifies deductions for vehicle expenses

08-11-2022Tax Information

You can use a recent Tax Court case ruling to help protect you against the Internal Revenue Service questioning your vehicle expenses.  Gonzalez, TC Summary Opinion 2022-13, 7/18/22 ruled that you can deduct vehicle expenses related to a side-gig, as long as you follow strict rules. 

What you need to know and do:

Generally, expenses relating to use of a car, van, pickup, etc. used for business are deductible. If you drive your own passenger car to visit clients or customers, you may write off the portion of your vehicle’s costs that is attributable to business use, subject to some special limits. If you use your car 80% for business, you can deduct 80% of the costs. 

There are two allowable methods to compute the expense.

  1. Standard mileage rate: This is a flat rate adjusted by the IRS at least annually. For 2022, the deduction is 58.5 cents per business mile for the first half of the year through June 30, 2022 and 62.5 cents for the second half. You can add in business-related parking fees and tolls.
  2. Actual expenses: Alternatively, you can deduct actual expenses based on the percentage of business use. This includes gas, oil, insurance, repairs, licenses, tires, etc., plus a depreciation allowance.

The actual expense method may provide a bigger deduction than the standard mileage rate; but there is more paperwork. You must keep receipts, invoices and other documentation to show costs and establish the identity of the vehicle for which the expenses were incurred. For depreciation purposes, you must document the original cost of the vehicle and any improvements, as well as the date it was placed in service.

BEST PRACTICE - The best way to secure a deduction is to keep a contemporaneous log or comparable record of expenses and business use.  This includes the date, business purpose and number of number of miles driven.