Did you start a business and buy a car last year? If so, you’re in luck!
Both are cause for tax celebration, as the IRS rewards vehicle-owning entrepreneurs with some pretty excellent tax deductions.
Tax season comes to a close on April 15th, meaning that most business owners are looking closely at which expenses they can write off.
You may thus be looking at your shiny vehicle and wondering, “Can I write off my car?” If so, this post is for you.
Keep reading for the answer to this question and others!
Taxes and Business Expenses
Owning a small business comes with its tax perks (and disadvantages).
The IRS generously allows business owners to deduct eligible expenses, resulting in a potentially fatter refund.
The IRS doesn’t allow taxpayers to deduct all business expenses, however. For example, you aren’t allowed to deduct personal expenses, like living costs, or capital expenses, such as start-up costs.
You also can’t deduct the cost of goods sold. This refers to the number you subtract from your gross profits to assess your net profits for the year.
Do not despair at this, however. There are plenty of other deductions available for business owners!
You can, for example, deduct what you pay your employees to perform their work. This can be an immense annual expense.
Business owners can also deduct expenses incurred for contributing to employees’ retirement plans, renting property, and purchasing business insurance. This is only the tip of the iceberg, however.
We recommend investing in accounting services to ensure you are maximizing your deductions every year.
Writing Off Car Expenses
What does the Internal Revenue Service (IRS) say about writing off a car for business?
On its website, the IRS specifies that you can indeed write off auto expenses if you use your car for business purposes. If you happen to use your vehicle for business and personal purposes, you have to divide your expenses accordingly.
What does the IRS mean by car expenses? Here are a few ideas.
If you have purchased your car solely for business purposes, you can deduct its annual depreciation in value every year. This applies to new and used cars.
However, the IRS can be a bit stingy here. It limits this depreciation value for luxury cars to $10,000 (plus a bonus $8,000 in depreciation) in the first year.
If you’ve purchased a non-luxury vehicle, like an SUV or a service van, you have a bit more wiggle room. You can expense such a vehicle’s cost using 100% of its depreciation value.
Did you know that you can deduct 54.5 cents for every mile you drive your vehicle for business purposes?
This is higher than 2017’s standard mileage rate.
Of course, this deduction applies only to miles incurred for business purposes alone. If you use your personal car for a mix of business and personal purposes, you’ll have to accurately calculate how many miles you drove it for each.
You can also only deduct mileage at this rate if you claim the standard deduction (not if you itemize expenses).
If you’ve financed a car for business purposes, you don’t get to write off your monthly car payments (unfortunately).
You can, however, write off any interest you pay on that lease, provided it’s paid through the business itself. The same goes for registration fees and property tax.
If you rent a vehicle for business purposes, you can write off the entire expense. This includes any relevant fees or insurance costs.
Once again, you can only write off 100% of the fees if 100% of them went to business purposes.
You can deduct other auto expenses, such as maintenance and service costs, for vehicles used for 100% business purposes.
So, if you got your business car outfitted with new tires and a fresh transmission, those expenses can be fully deducted! The same goes for oil changes, fuel, and the like.
If you paid any tolls or parking fees using your business vehicle, these can also be deducted.
What You Can’t Write Off
You can’t write off auto expenses related to hired cars, such as taxi cabs or airport transfers.
You also aren’t eligible to deduct expenses for personal use of your vehicle. This is part of the IRS’s general stipulation about deducting business expenses.
Technically, you can’t write off expenses you can’t “prove.” So, keep an accurate record of your vehicle expenses and hold onto any relevant receipts.
Now you know everything there is to know about writing off a car for business. What happens next?
Make sure you have accurately totaled your auto expenses. If you struggle to do this in any way, consider investing in expense tracking software for next year, such as Quickbooks.
If you have yet to start your business, think carefully about the extent to which you’ll use a vehicle for business purposes.
If your car will be a critical component of your business, you may want to buy a new vehicle for this purpose alone. This can minimize the headache of tallying up personal and business miles.
Search here for ideas!
Some business owners are content to use their personal vehicles and simply keep track of the different miles and expenses themselves. If you do this, make sure you have a system in place for accurate reporting.
These could be digital or manual (like a vehicle reporting journal you keep in your car).
Can I Write Off My Car for Business?
So, you may be saying, can I write off my car as a business owner or not?
The IRS does enable business owners to deduct auto expenses, provided these were incurred for business purposes only. You can’t deduct personal auto expenses.
What’s more, you can only technically write off the depreciation value of your car every year. You can do this if you itemize your expenses and if the car is used only for business (not personal use).
Thinking about buying a company car? Check out this post on some great customization tips.