Knowing how to handle vehicle expenses for tax purposes can lead to significant savings. Whether you're using a personal vehicle for business or purchasing a new vehicle specifically for your company, understanding the rules can help maximize deductions. In this blog, we'll explore different vehicle-related tax implications, including depreciation, write-offs, and mileage tracking.
Business Use of a Personal Vehicle
If you're using your personal vehicle for business, you can deduct the portion of expenses related to business use. It's crucial to distinguish between personal miles, business miles, and commuting miles:
Business Miles: Miles driven strictly for business purposes, like client meetings or deliveries.
Personal Miles: Any non-business-related driving, such as personal errands. These are not deductible.
Commuting Miles: The miles driven from home to your primary workplace. These are typically not deductible.
By keeping a detailed log of your business miles, you can claim deductions either through the standard mileage rate or actual expenses, which we'll cover in more detail below.
Personal Use of a Business Vehicle
If a business vehicle is used for personal purposes, the IRS considers it a taxable fringe benefit. This means the personal use of a business vehicle must be reported as income.
There are various methods for calculating personal use, including the commuting valuation method, which assigns a fixed value per commute, or the lease value rule, where the value of the vehicle’s personal use is calculated based on its fair market value.
Example: If a small business owner uses a company car for weekend trips, the value of that personal use would need to be included in the owner's taxable income.
Bonus Depreciation vs. Section 179 Expensing
When you purchase a vehicle for business use, you can deduct part of its cost using either bonus depreciation or Section 179 expensing. Here's how they compare:
Bonus Depreciation: Allows you to deduct a percentage of the vehicle's cost upfront in the first year. Under the Tax Cuts and Jobs Act (TCJA), bonus depreciation is 60% for 2024, down from 100% in previous years. Both new and used vehicles qualify, making it a flexible option.
Section 179 Expensing: Offers a similar benefit but is subject to stricter limits. For 2024, small business owners can deduct up to $1,160,000 for equipment, including vehicles. However, this limit phases out if the total equipment purchased exceeds $2,890,000. Section 179 is often more restrictive for luxury vehicles, which are capped at $19,200 for 2024.
Writing Off the Purchase of a Vehicle
To write off a vehicle's cost, it must be used primarily for business (more than 50% of the time). Depending on the vehicle type and use, small business owners have the following options:
Bonus Depreciation or Section 179 for eligible vehicles.
Depreciation over several years for vehicles that don’t qualify for full expensing upfront (e.g., luxury vehicles).
Heavy vehicles like SUVs and trucks weighing over 6,000 pounds may be eligible for a larger deduction under Section 179, sometimes even up to the full purchase price.
Actual Cost vs. Mileage Deduction
Small business owners have two options for deducting vehicle expenses:
Actual Cost Method: Deducts all costs related to the vehicle, including fuel, maintenance, insurance, and depreciation. This method requires detailed tracking of expenses and is often beneficial for newer, more expensive vehicles.
Standard Mileage Rate: In 2024, the IRS allows a deduction of 67 cents per business mile. This method simplifies record-keeping, but owners can’t also deduct specific expenses like gas or insurance.
Important Rules:
Once you choose the actual cost method, you cannot switch to the mileage deduction in future years for the same vehicle.
If you have already depreciated the vehicle, you are not eligible to use the mileage deduction.
You cannot double dip by using both methods in the same year for the same vehicle. Choose either the actual cost method or the mileage method for the entire year.
Tracking Requirements
Accurate tracking is essential for claiming any vehicle deduction. Business owners should maintain detailed records, including:
Date and purpose of the trip.
Beginning and ending mileage.
Total miles driven for business.
Failing to keep proper documentation can result in the loss of deductions or penalties, if audited by the IRS.
Other Vehicle-Related Deductions
In addition to depreciation and mileage, small business owners can deduct:
Interest on vehicle loans used to finance business vehicles.
Leasing costs if leasing instead of purchasing.
Sales tax paid on the vehicle, which can be claimed as part of the cost.
Conclusion
Vehicle-related expenses can provide significant tax benefits for small business owners but navigating the rules requires careful attention. From tracking business miles to understanding the difference between bonus depreciation and Section 179 expensing, proper planning can lead to substantial savings.