Deducting Auto Expenses in Your Practice

As a tax advisor to small business owners, I field countless questions regarding what is a deductible business expense and what is not. While some expenses are clearly deductible and others are clearly not, there is a sizable gray area where deductibility relies on factors unique to the business, its industry and its activities. This is especially true when it comes to automobile expenses.

The IRS tells us that in order for an item to qualify as a tax deductible business expense, it must be “ordinary” and “necessary”, which is vague enough to open the door to a broad range of interpretations. While it may be tempting to take an aggressive approach, it is important to note that the taxpayer bears the burden of proof in a tax audit, and the IRS really has no incentive to go along with an iffy tax position that benefits the taxpayer. Because automobile expenses are regularly incurred for both business and personal purposes, these expenditures are almost always targeted in business tax audits.

Examples of clearly deductible auto expenses include driving:

  • Between multiple office locations
  • To and from business networking and educational events
  • For administrative purposes such as picking up office supplies and making a bank deposit

However, driving between your home and office is generally considered nondeductible personal mileage. Therefore, if you have a single location, office-based practice (which fits the description of the vast majority of dental practices), then it is difficult to accumulate enough business miles to justify purchasing a vehicle in the practice and deducting anywhere close to the full cost of the vehicle plus its maintenance and operation.

Instead, a preferable way to deduct your business use might be to own your vehicle personally and charge the practice back for the business usage. This can be done by using actual automobile expense records or by tracking your business mileage multiplied by the IRS standard mileage rate (56 cents per mile in 2014). Yes, both of these methods require painfully detailed record keeping, but the IRS can and does use inadequate documentation to justify disallowing otherwise deductible business expenses.

In conclusion, be careful when deducting automobile expenses in your business. Failure to adequately account for the business purpose and amounts of these expenditures can result in a bad tax outcome if your return is selected for audit. If you are ever unsure of the deductibility of your auto expenses, give us a call and we will be glad to perform an analysis on your behalf.