Tax Tip Thursday

This week, I would like to talk about motor vehicle expenses as they pertain to sole proprietorships/partnerships.

There seems to be a lot of different ideas about how you can claim these expenses for your business.

I have to be honest, I find it kind of funny when people tell me what and how you claim car expenses.

For instance:

• you can claim the car payment,
• you can claim the lease payment,
• you can use a rate per km,
• you can just estimate a % of use,
• you just have to keep your mileage for 1 month or 3 months
• and so on and so forth.

There really is no end to what people know about writing off vehicle expenses!

But here are some facts and even direct quotes from the CRA.

Sole proprietorships are the most common form of small business, so I will talk about them this week and we talk about motor vehicle expenses for a corporation next week.

The rules I am about to discuss apply to both sole prop and partnerships, but NOT corporations.

What can you claim

You can claim a % of:

a) The total operating expenses
b) The CCA
c) Interest

The term “operating expenses” includes:

• the cost of fuel,
• maintenance (for example, car washes, grease, oil and servicing charges),
• repairs (other than accident repairs),
• licenses,
• insurance and,
• “eligible” leasing costs – please note, this does not mean you deduct the monthly lease cost as an expense – that is not the way it works.

Less any rebates not included in the individual’s income.

Accidents and repairs
If the accident occurred while using the vehicle for business purposes, then I tis deductible (less insurance coverage). If the accident occurred during personal use of the vehicle, then it is NOT deductible

In order to dispel some myths, here are some direct quotes from the CRA. These ARE the rules.

To be deductible, “motor vehicle” expenses must be reasonable in the circumstances and supportable by vouchers. Ie receipts and they must be kept
A claim by an individual for “motor vehicle” expenses calculated on a cents-per-kilometer (mile) basis is not acceptable.
To support a claim where a “motor vehicle” is used in part for business purposes and in part for personal purposes, a record should be kept of total distance traveled and distance traveled for business purposes in a year. The record should contain at least the date, destination and distance traveled for each trip. Ie. Mileage log

The scary thing is many people do not know this, people who are doing their own or worse yet, someone else’s taxes. I am doing someone’s taxes right now that has been claiming a rate per km for the last 10 years and their taxes were always prepared by an accountant.
So if they were reviewed/audited, not only would that claim be reversed, the person would not even be able to submit a revised deduction properly as they don’t have the receipts for the vehicle expenses. They were told they didn’t need them using the rate per km method. The lack of receipts is VERY COMMON

How do you claim

If you use your vehicle partly for business and partly for personal, the deductible amount is the proportion of driving you did for business to the total km for the year (in most cases!)

For example, where the aggregate of
a) The total operating expenses
b) The CCA
c) Interest

For a year is $10,000 and the total distance traveled for the year is 40,000 kilometers of which 30,000 represent business use (75%), the deductible amount is also 75% or $7,500.
Please keep in mind, it is not that simple. There are various schedules and calculations, so you are best having it done correctly by someone who knows. As you can see there are a lot of potential pitfalls.

Don’t let common vehicle expense pitfalls cause you headaches!  Make An Appointment today!

Disclaimer:

This article provides information of a general nature only. It is only current at the posting date. It is not updated and it may no longer be current. It does not provide legal or tax advice nor can it or should it be relied upon. All tax situations are specific to each individual. If you have specific tax questions you should book an appointment for a 1 on 1 consultation.