Business Vehicle Deduction
Business Vehicle Deduction
Some businesses rely on a vehicle or even a fleet of vehicles to perform their daily tasks. You might have a plumbing business, for example, and a van that takes you from one customer to the next. Your bakery might have a delivery truck, insuring that local restaurants all have fresh baked bread each morning.
Whatever the reason for your business vehicle use, you need to know that there are implications from the business use of vehicles. Here are some things you need to know about the business vehicle deduction as far as the government is concerned:
Business Vehicle Deduction Considerations
•Not all vehicles qualify for the business vehicle deduction. For example, vehicles that are used as equipment – such as a dump truck – have different rules than other vehicles. The same goes for vehicles that are used to hire, including things like limousines or taxi cabs.
•There are rules about luxury cars, too. Congress passed laws many years ago that prevent businesses from claiming a business vehicle deduction for extravagant expenses for the business owners. For example, there are maximum write-offs for depreciation for both new and used vehicles. If you purchase a luxury $50,000 SUV for your business, you’re only going to be able to expense $25,000 of that. Of what’s left, half of the remaining balance can be claimed for bonus depreciation (in this case, $12,500). Then 20% of what’s left after that can be taken as regular depreciation. The rules differ between cars and trucks, as well.
•Documentation is key. The IRS will nail you if you’re claiming a business vehicle deduction and you don’t keep good records. Make sure you have a detailed log of how you’re using the vehicle for business purposes. A vehicle expense log (or even a smartphone app that helps you track these things) can be an invaluable asset.
•You’ll have to choose between taking a standard mileage rate or claiming actual expenses. The standard mileage rate usually works best for you if the vehicle is more economical to operate. If your vehicle has significant costs in terms of gas, repairs, or other issues, then an actual expense model works better. It’s often best to run the numbers both ways and see which is most advantageous.
•You can take a business vehicle deduction for a certain amount of general wear and tear, too. This is known as depreciation. If you’re using the standard mileage rate, it includes the amount of depreciation and factors that into the equation. Depreciation will work differently if you’re claiming actual expenses; here again, you’ll want to look at it both ways and see what makes sense for your business.
•You need to carefully consider who owns the vehicle. This can get a little bit tricky, especially for a corporation. Even for a sole proprietor, if you have an employee that uses a personal vehicle for business purposes you will typically reimburse them for their business mileage. The employer can’t then claim the business vehicle deduction.
•It’s different if the vehicle is owned by a corporation. A corporation, on the other hand, can’t use the standard deduction. They’re required to use actual operating expenses. The business can deduct the percentage of use for business purposes; if the company provides a car to an employee, they can’t deduct the personal use directly. Instead, it’s treated, for tax purposes, as a compensation expense.
•It matters if you buy or lease, too. If you have a leased vehicle, you can use the standard mileage rate. In this case, you can’t deduct the lease vehicle payment. In addition, there is no depreciation for leased vehicles. Instead, when the value of your leased car is over a certain value, you have to subtract what’s known as an “income inclusion” from the deductible.
•The most important thing about business use of vehicles is your record keeping. Yes, we already mentioned that documentation is important, but consider this: without actual, verifiable records, if you face an audit your business could be on the hook for a significant tax penalty.
*Maintain and secure these records on a regular basis.
If you’re still confused about the business vehicle deduction, or if you feel like you could benefit from a closer look at your situation, talk to your tax professional today. He or she can help you figure out what type of configuration works best for your individual business.
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