Every deduction in taxes counts, especially for business owners. And there’s one tax-deductible item many of them possess but aren’t aware of.
Getting tax deductions is always welcome, especially for small business owners. And there are many ways for you to avail them.
One of which is something that’s often overlooked, which is the vehicle expense.
For many, a vehicle is just a means of transportation. But for business owners, it’s a vital part of their operations. Yet, not a lot of them know that it is a tax-deductible item.
The Australian Taxation Office (ATO) allows individuals and businesses to claim tax deductions for vehicle expenses incurred for business purposes. However, you must first know what qualifies as a deductible vehicle expense and how to claim it.
This article will shed light on that. We’ll also explore the three primary methods available for claiming vehicle expenses to lower your tax payment. This way, you can decide which one is best suited to your situation.
What Qualifies as a Vehicle Expense?
This isn’t simply just about your car.
Your vehicle expenses include a wide range of costs, like fuel and oil or repairs and maintenance. Vehicle insurance costs, registration fees, and depreciation are also classified as such. Also covered here are your lease payments and interest on motor vehicle loans.
For these expenses to be considered tax-deductible, the vehicle involved should be used for business purposes. For instance, you use it for visiting clients, attending business meetings, and carrying equipment for business use.
Three Methods For Vehicle Expense Tax Deductions
Method #1: Actual Costs Method
This involves claiming actual expenses incurred with the use of your vehicle for business during the fiscal year. The Actual Costs Method is comprehensive, allowing for a potentially higher tax deduction.
However, it is time-consuming and requires diligent record-keeping on your part. This includes collecting all receipts that are related to your vehicle expenses—from fuel, maintenance, and insurance, to any other related vehicular costs.
You must also create and maintain a logbook to jot down detailed accounts of all journeys made by that vehicle for business purposes. Using this logbook will establish the business-use percentage or how often the vehicle was used for business compared to private use.
Then, at the end of the year, you will have to add up all your vehicle expenses. You then need to use the business-use percentage to calculate the deductible amount on your tax.
If your vehicle expenses are substantial, you can get higher tax deductions.
Method #2: Cent Per Kilometre Method
Unlike the Actual Costs Method, this is a straightforward way to claim vehicle expenses. The Cent Per Kilometre Method doesn’t require detailed documentation. Instead, you claim a fixed rate for each kilometre travelled by your vehicle for business purposes.
The Cent Per Kilometre method involves the following steps:
- First, you must keep track of and identify the number of kilometres you’ve driven using your vehicle for business purposes.
- Then, identify the rate set by the ATO. For 2023-2024, the set rate is 85 cents per kilometre.
- To calculate your tax deduction, simply multiply the number of kilometres you’ve identified by the rate set by ATO.
This method is relatively simple, not requiring you to keep a log and save your receipts.
However, the Cent Per Kilometre Method is capped at 5,000 kilometres per year. So, it may not be that beneficial for business owners who are heavily reliant on their vehicles for their operations.
Method #3: Logbook Method
This is another detailed way to claim vehicle expenses based on the actual business-use percentage. But unlike the Actual Costs Method, the tax deduction via the Logbook Method is determined over at least a 12-week representative period.
To be precise, you have to keep a continuous and detailed log of all your vehicle usage for a period of 12 weeks. And you need to identify when your vehicle was used for personal and business purposes.
Your logbook will be the main reference as to how your tax deductions will be calculated. You’ll also need it to know your business-use percentage.
To find out how much you can claim for vehicle expenses with the Logbook Method, use the same approach for the Actual Costs Method. Calculate your vehicle-related expenses over the prescribed 12-week period. Then, multiply that figure by your business-use percentage.
Since it is highly similar to the Actual Costs Method, it also leads to significant tax deductions if the vehicle was used immensely for the business.
Choosing the Right Method
Ultimately, selecting the right method to use to claim a tax deduction for vehicle expenses depends on how you use your vehicle for business purposes. And you also have to consider your record-keeping ability and personal preferences.
As mentioned, both the Actual Costs Method and the Logbook Method can offer higher tax deductions. This is especially true if you are relying heavily on your vehicle to keep your business running. However, it requires you to keep detailed records and receipts, making it more time-consuming.
In contrast, the Cent Per Kilometre Method provides simplicity and ease. The caveat is that there are limitations on the claimable amount. So, this is ideal for business owners who aren’t that reliant on their vehicles to ensure smooth business operations.
But if you’re unsure which method will allow you to get the highest tax deduction you possibly can, then consult a tax professional. They can determine which method best suits your specific circumstances and which one will get you the most savings on your taxes.
Maximise Your Tax Deduction For Vehicle Expenses
Admittedly, getting a tax deduction for the use of your vehicle for business is not as straightforward as it seems. You need to understand and apply the correct method for claiming vehicle expenses. At the same time, you must ensure compliance with tax laws.
Proper management of this particular deduction on your tax may seem inconsequential. But it can have a significant impact on the financial health of your business. As such, make it a crucial aspect of your tax planning.
But if you need more than this type of tax deduction to give your business a boost in funding, don’t worry. Unsecured Finances is here to help you. Apply online and you can receive your approval within 24 hours.
Find out more by taking a look at our unsecured business loans.
