How to Deduct Your VehicleAug 12, 2022
When it comes to deducting vehicle costs in your business, there are multiple ways to go about it. Tax gurus on TikTok will have you thinking you can deduct the entire cost of a G-Wagon and have the IRS pay for it, but that is not the case.
First, you have to establish how much you plan to use a vehicle for business purposes and if your business would put the vehicle on its books. If you use the vehicle more than 50% for business, then it makes sense to put the vehicle under the business's name most of the time. If you purchase a vehicle under your business name, this also means that you would depreciate that vehicle, Depreciation is meant to represent the decline in book value of the vehicle over time. There are specific accounting formulas to determine your depreciation. The good news is that depreciation lowers your business profits and your taxable income.
Normally, depreciation accounts for a portion of the value of the vehicle or equipment each year over time. The expense is spread our over multiple years. Most vehicles have a five-year useful life for tax purposes. However, if you want to accelerate your depreciation and deduct all of the vehicle value in the year purchased, you do have an option for the rest of 2022.
If the vehicle is over 6,000 pounds and is used over 50% for business, there is a unique tax rule that applies. This is called Section 179. It allows you to deduct the entire cost of the vehicle in the first year, as long as it meets these requirements.
Which vehicles are over the weight minimum? Check out this article by MileIQ or visit the website of your car manufacturer.
There are limits to Section 179 based on the type of vehicle purchased if the vehicle is under 6,000 lbs. If you want to take additional depreciation, there is another layer of this called bonus depreciation. Bonus depreciation is also available in 2022 for 100% of the cost of the vehicle. This changes from year to year and 2022 is the last year that 100% bonus depreciation is available. The amounts then subsequently decrease to 80% (in 2023, 60% in 2024, 40% in 2025, and 20% in 2026 unless further tax law legislation is enacted. Section 179 depreciation is normally taken first, followed by bonus depreciation if the limits are met. There are limits to bonus depreciation based on the type of vehicle.
So, let's say you don't meet the requirements to deduct the vehicle entirely. What are your options?
If you use a personal vehicle for business purposes, there are various ways to deduct the business-related costs. The most important thing to remember when deducting a business vehicle is to keep track of your business mileage. The IRS requires that you have a record of your business miles in order to deduct them. You can either use a paper log or an app like MileIQ. Either way, make sure you are accurate and consistent with your records.
Once you know how many business miles you drove during the year, you can take a deduction using one of two methods. The standard rate method is the easiest, just taking the current standard mileage rate and multiplying that by the number of business miles. The other method is called the actual cost method. In this method, you calculate the business use percentage by dividing your business miles by the total miles driven in the year. This requires you to diligently track. From there, you can apply that percentage of the actual costs as a deduction. For sole proprietors and single-member LLCs filing their taxes on Schedule C, this is computed when you go to file your tax return.
If your business is an S Corp or C Corp, you can use an accountable plan (fancy word for reimbursement plan) to reimburse yourself as an employee for the costs on a monthly basis directly from the business bank account. You would use one of the two calculations describe above to compute the amount.
There are a lot of moving parts when it comes to deducting a business vehicle, but the most important thing is to make sure you are accurate and consistent with your records. The IRS is very strict when it comes to deductions, so it is better to be safe than sorry.
Stay tuned for podcast episodes on this topic and stay on top of changes in the tax law that could impact these deductions.