Tax Deductions for the Business Use of Your Vehicle
If there is a list of top questions CWA advisors get, how to deduct a vehicle purchase and related vehicle expenses would be near the top. One reason is that we are all looking for a reasonable tax deduction, but the caveat is that the answer isn’t as simple as we’d like.
“It’s no surprise why this is such a compelling topic,” says CPA Scott Clynch. “But from a client’s perspective, it’s confusing. And from a tax law standpoint, the rules seem to change constantly.”
Add to the moving target that not all CPAs agree on how to approach this deduction, it’s clear why, year after year, this always comes up.
The short answer: You can deduct your vehicle if it is used for business purposes.
The real answer: How much you can deduct each year depends on several factors.
VEHICLES USED FOR BUSINESS PURPOSES
Your vehicle must be used for business purposes to qualify for deductions.
Business purposes may include travel from one workplace to another, additional trips to supply stores, satellite locations, the bank or trips to business meetings away from your regular workplace. It does not include trips to and from your home to your office.
Additionally, if you use the car for both business and personal purposes, you may only deduct the portion that’s for business use.
TYPES OF DEDUCTIONS
Deductions on Business Expenses: If you use your vehicle for business purposes, you can deduct a portion of the cost of ownership and operation of your vehicle. This is limited to the percentage in which you drive your vehicle for business purposes. Ownership and operation should be paid through the business.
- Ownership: This is the purchase price of the vehicle. The deduction is based on the vehicle’s weight being over or under 6,000 lbs. While there are no maximum vehicle costs, this is limited, in part, to the portion you drive for business purposes.
- Operation: These are all other expenses related to owning the vehicle (insurance, gas, maintenance, repairs, etc.) Deductions including operation expenses are also limited to the portion you drive for business purposes.
Depreciation: There are three methods to depreciate your vehicle. Sometimes you use all three in a year; sometimes you use only one or two.
You usually use all three methods in the year you purchase the vehicle. Every year after, for the next four years, you use MACRS only (the other two are only used in the year of purchase).
- Section 179 Depreciation- Tax benefits from Section 179 of the tax code are limited to $10,200 for cars under 6,000 lbs. and $26,200 for cars 6,000-14,000 lbs. and must be used in year one only.
- Bonus Depreciation- Bonus depreciation can be taken on top of Section 179 depreciation in the initial year of the vehicle purchase. For cars under 6,000 lbs., the cap is $8,000. There is no cap for vehicles over 6,000 lbs.
- You are limited to the percentage of business use for bonus depreciation.
- MACRS Depreciation – If there is any tax basis left over after applying Section 179 and bonus deductions, then you can qualify for MACRS depreciation. MACRS allows the capitalized cost of an asset to be recovered over a specified period via annual deductions, published by the IRS.
Depreciation Example: If you purchase a 6,000-pound car for $100,000 that you drive 60% for business use, you can technically take all the Section 179 maximum limit ($26,200), which would leave $73,800 available for depreciation. On that $73,800 amount, you can also take bonus depreciation at the percentage used for business purposes ($73,800 x 60%).
“If you want to use Section 179, not only must the vehicle be titled in the name of the business, but it really matters if the Gross Vehicle Weight Rating of the car is under 6,000 pounds,” says Scott. “Basically, to get the most bang for your buck, your car needs to be over 6,000 pounds.”
Benefits from depreciating your car are significantly limited if your car’s Gross Vehicle Weight Rating (GDWR) is under 6,000 lbs. Gross Vehicle Weight Rating is the vehicle’s weight plus the weight of passengers and cargo. You can find this number on the car door panel or do a quick internet search for the make and model.
- You lease your car: Owners can deduct some expenses if they lease it; the rules are different. Section 179 is available to all vehicle types if you drive it for more than 50% business use.
- It’s a luxury car: The deduction is based on whether the weight is over or under 6,000 lbs. The cost of the vehicle doesn’t make a difference. A Mercedes G Wagon is treated the same as a Honda Civic.
- You sell your car soon after you bought it: In some situations, you must “recapture” some of the depreciation you took on a vehicle if you sell it afterwards. The result is taxable income to you in the year you sell the vehicle. Ask your CWA advisor about the tax implications of this.
DON’T DO THIS
- Write off the purchase price and claim the standard mileage deduction in the same year.
- Deduct a depreciation amount more than your business’s net income for the year if using Section 179.
- Deduct more than one vehicle on your tax return at any time.
- Claim 100% business use (this is a red flag for the IRS).
- Fail to keep mileage records.
There are ample opportunities for business owners to take advantage of the tax benefits. But it is more complicated than it seems to ensure you get the full extent of the allowable deductions while not exposing yourself to the risk of audit.