As a new year begins, now is the time to get yourself organized to maximize the vehicle deduction for your tax return. The ability to deduct expenses that relate to the business-use of your vehicle provides a great opportunity to reduce the taxable business income for your sole-proprietorship however, it’s a deduction that is often under-utilized.
What does the vehicle deduction include?
How does the deduction work?
Your total vehicle expenses are prorated based on the portion of vehicle-use that relates to your business (to earn income). Let’s use an example. Say you drove 15,000km during the year, and 4,500km were for work. This means the business related portion is 30% (4,500 / 15,000). This 30% is then applied to each of your vehicle expenses to calculate your deduction. So, if you spent $2,500 on gas, your deduction would be $750 (30% x $2,500).
How do you determine the business-related travel?
At the beginning of the year, record your odometer reading. Do the same at the end of the year. This will tell how you many kilometers you drove during the year. The business-related travel is determined based on a travel log. The CRA requires a log to support the kilometers driven to earn income that includes: date, destination, purpose, kilometers driven (for more information on the CRA requirements and information on a simplified log-book, click here.)
Hold on to your receipts
Find a system that works for you to ensure you keep all of your receipts and bills relating to your vehicle expenses. Gas receipts (make sure you get the detailed receipt from the pump or cashier) accumulate quickly and often end up all over the place so an envelope in your glove compartment might be a good way to keep them organized.
If you’d like to read the CRA guidance for this deduction, click here. For more information on this and other income tax deductions for sole-proprietors, get in touch and request a copy of our handy tax checklist.