Deducting Vehicle Expenses

Vehicle expenses can be a major business deduction for family child care providers – and are often audited by the IRS. Therefore, it pays to know what you can deduct and how to keep accurate records. You can count a trip as a business trip if the “primary” purpose of the trip is business.

Primary purpose means that more than 50% of the reason for the trip is business. This includes children’s field trips, trips to the bank to deposit parent fees, and trips to trainings. A trip to the grocery could be claimed as a business trip if more than 50% of the food purchased was for the business.

However, don't claim every single trip to grocery stores or to Target or Walmart, even if you are always spending more money on business items than personal items.

The IRS will not allow this. You must have an “adequate record” to show that you made a business trip: calendar notations, receipts, cancelled checks, credit or debit card statements, field trip permission forms, training certificates, mileage log, photographs, and other written records.

You may want to review these records monthly to make sure you’ve identified all your business trips. You are not required to keep a mileage log of odometer readings. You do want to record the odometer reading of your vehicle at the beginning and end of each year.

You can claim business trips if your spouse uses his/her vehicle for your business, regardless of who owns the vehicles. If you aren't married, you can't count miles for a vehicle used by your boyfriend or for a vehicle you don't own. There are two ways to claim vehicle expenses: the standard mileage method or the actual expenses method.

Standard mileage method

Using this method you would add up all your business miles and multiply them by the IRS standard mileage rate for each year. For 2022 the rate is $.58 per mile. In addition, you can claim parking, tolls and the business portion of any vehicle loan interest and vehicle property tax (the tax you might pay each year when you pay for your license plate tabs). The business portion is based on your business miles divided by the total miles driven in that vehicle.

So, if you drove 3,000 business miles and a total of 10,000 miles, your business portion is 30% (3,000 divided by 10,000). Then you would get 30% of your vehicle loan interest. That's all you can deduct using this method.

Actual expenses method

Using this method you can deduct the business portion of all the actual expenses for operating your vehicle: gas, oil, repairs, vehicle insurance, parking, car wash, ice scraper, vehicle depreciation, car loan interest, and more. You must save receipts for all of these items. The business portion is calculated the same way as described above.

Which method is better?

Most child care providers use the standard mileage method to claim vehicle expenses because it’s easier to keep records. However, many would be better off using the actual expenses method. In the first year you use your vehicle for your business you can choose either method.

However, if you choose the Actual Expenses Method you must continue using this method for as long as you use that vehicle in your business. If you choose the Standard Mileage Method in the first year, you can switch to the actual method in later years. If you use more than one vehicle for your business, you can choose one method for one vehicle and another method for the other.

Leasing

If you lease a vehicle you can choose either method when deducting expenses. If you choose the actual method you can deduct the business portion of the lease, gas, insurance, oil changes, and other out-of-pocket expenses. In general, leasing will cost you more money over the long run than buying the vehicle. For a complete discussion of the pros and cons of leasing, see my book Family Child Care Money Management and Retirement Guide. 

Tom Copeland - www.tomcopelandblog.com

Image credit: https://www.dreamstime.com/woman-driving-suv-vehicle-sideview-cartoon-vector-illustration-graphic-design-image155272479

For more information, see my Family Child Care Record Keeping Guide.