Writing Off Vehicles as Tax
Deductions
by: Stephen L. Nelson, CPA
You’ve heard it a hundred times: That shiny new car your buddy just bought? It
doesn’t really cost him anything. He writes off the car as a tax deduction.
Your first thought is usually, “That can’t be
right.” Your second thought is, ‘I got to figure out how to enjoy that
loophole.”
But what does the law say? And what are the
rules for writing off vehicles? It turns out that you can write off the cost of
buying and using a car if you’re self-employed and use your vehicle in your
business. Specifically, you can probably deduct the business portion of your
vehicle expenses on your business tax return.
But this deduction is trickier than most people
realize. Here’s the first big thing that goofs many people up. You need
substantiation to prove your business use. Ideally, in fact, the Internal
Revenue Service wants you to keep a log of your business miles, your commuting
miles, and your personal miles.
With this information, you can then either
deduct an amount equal to the business miles times a standard per-mile rate of
roughly $.35 or $.40 a mile (depending on the year)… or you can deduct the
percentage of your vehicle expenses equal to the percentage that your business
miles represent.
Note that only your business miles—and not your
commuting miles or personal miles are deductible.
For example, if your business use equals 5,000
miles, personal use equals 3000, and commuting equals 2000 miles, your total
miles for the year equal 10,000. Business miles as a percentage of total miles
equal 50% because 5,000 divided by 10,000 equals .5 or 50%.
In this example, you could therefore deduct 50%
of your fuel, 50% of your insurance, 50% of your maintenance and repairs, 50% of
the car loan interest, 50% of the depreciation, and so on, as a business
deduction. This means you can’t ever deduct all the costs of owning and running
vehicle—only the business use of a vehicle.
If you don’t have exact records about your
business use, you can sometimes use good sampling. For example, if you keep a
good appointment calendar of your business activities, one popular tax reference
suggests that you can look at the total business, personal and commuting miles
driven during one week each month. Then, you can average this data to get good
weekly estimates of your business, personal, and commuting miles. Finally, you
can multiple these weekly estimates by 52 (the number of weeks in a year) to get
reasonable estimates of your business, personal and commuting miles.
But before you go out and buy a new luxury auto,
you need to know there’s another complication. Congress limits in most cases the
amount of depreciation or lease rental that you can include in your vehicle
expense calculations. The rules are a bit tricky, but essentially, for purposes
of vehicle depreciation and lease payments, you only get to look at the first
$17,000 (roughly) of vehicle cost. In other words, if you buy a $60,000 vehicle
and your friend buys a $15,000 vehicle, you may both have the same business
depreciation expense—even though your vehicle costs four times what your
friend’s does.
One other related point: You may have heard
about the sport utility vehicle loophole. This SUV loophole really does exist.
Specifically, the luxury auto limits mentioned above don’t apply to sport
utility vehicles that weigh more than 6,000 lbs. Note that Congress partially
closed that loophole in 2004, however, by saying that a special,
super-accelerated form of depreciation called Sec. 179 depreciation can’t be
used to write off all of the cost of an expensive SUV in the year the vehicle is
purchased. |
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