How to Treat Personal Car In Your Business

After last week’s very high level post about finding your “why,” I figured it’s time to get back to some more nuts and bolts of running your small creative shop. So we’ll talk about that personal car you use occasionally for work.

Each Indiepreneur’s work style will be a bit different. Some hide like vampires in their basement, rising when the sun sets and they’re beckoned forth by their familiar and/or collaborators. Others find a local Starbucks and let the light stream in. At least during non-lockdown times.

And some, every now and then, have to jump in their car and run work errands, like delivering goods to clients or picking up needed work supplies. And unless you’re driving that car for business an insane amount, you likely use your personal car for that work.

How does that work as a business expense? Does Solomon have to split your Honda in half?

Fortunately, no swords required. Any splitting is only metaphorical.

There’s a few different ways that you can handle the business half of your car. There’s an easy way, and there’s the hard way.

The Easy Way to Expense Your Personal Car

The most straight forward way to handle your business portion of your personal car is to track the amount of miles that are related to work then figure out the expense on a per mile method.

Fortunately, the IRS has done the cost per mile calculation for you. Will it be exactly what you spend for lease/car payments, insurance, gas, wear and tear, etc.? No, probably not. But coming up with an accurate number would be a nightmare, and the IRS wouldn’t accept it come tax time way.

A quick Google search will get you the IRS’s current year’s per mileage rate.

So let’s say you drive 20 miles in your personal car to a networking event for your business. If it’s the year 2020, you would multiply 20 by the per mile rate, which the IRS says is 57.5 cents per mile.

20 x .575 = $11.60 expense.

That’s about it. Though you do need to make sure you track those miles for when the IRS comes knocking. You don’t need to do the odometer readings like they used to recommend, but a Google Maps proof of Point A and Point B should get you enough support

WHAT THIS DOESN’T COVER: The mileage method is meant to cover all the normal expenses for your car, including insurance, wear and tear, maintenance, and gasoline. It DOESN’T cover parking and tolls. So if you have to take E-470 (Denver folk) or some other toll road, that’s separately deductible (confusingly, on the same line for the Schedule C). If you have to pay for parking when you get there, that’s also separately deductible.

The Hard Way to Track Those Vehicle Expenses

If you really want to, you can track all your expenses related to your car. You can then allocate those expenses pro rata between personal and business.

How are you supposed to allocate them? Well, by an allocation of miles. So either method is going to require your driving miles to be tracked. This way, though, you also have to track all your PERSONAL miles to give you a ratio.

You can get screwed on this method if you use your vehicle for less than 50% business. Then you can’t take any depreciation.

What’s depreciation? Let’s not get into it right now.

The worst part of doing the hard way is you’re unlikely to get a better answer unless your vehicle is used substantially all the time for business purposes.

In other words, Indiepreneuers, unless you’re doing some significant Uber driving on the side, you’re going to use the Easy Way.

Problem – Tracking the Cash

One potential problem with all of this from a bookkeeping standpoint is how you track the actual cash business expense of your car. Ideally your business expenses come out of a business account. With this kind of splitting, how do you do that?

Well, you could write a check from your business account to your personal account for the amount of miles times the IRS mileage rate. That would do it.

Most people I know don’t bother, though. They pay for 100% of the car from their personal account, then report the expense on their tax return, thankful for the extra deduction.

Which method you use is up to you.

Final Thought: What Are Business Miles

Quite a few people will ask what to include in their business miles.

The short answer: basically anything necessary to run your business.

Not commuting, though. Commuting isn’t considered a business expense, it’s just part of daily life if you work out of your home. Considering how many Indiepreneurs work IN their home, though, this isn’t an issue for most of you.

That trek up and down the stairs into the basement can be daunting, but I’ve yet to meet anyone who considers it a financial burden.