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For many business owners and self-employed individuals, purchasing a vehicle can be a significant expense. Fortunately, the IRS offers several ways to deduct the cost of a car used for business purposes on your taxes, potentially saving you thousands of dollars.
Understanding these deductions can help you maximize your tax benefits and make informed decisions about vehicle purchases. This article will guide you through the essentials of writing off a car purchase on your taxes.
Related: How To Deduct Vehicle Depreciation on Your Taxes
Who Can Write Off a Car Purchase?
The ability to write off a car purchase on your taxes primarily applies to business owners, self-employed individuals, and independent contractors. To qualify, you must use the vehicle for business purposes, with the amount of the deduction depending on the percentage of business use.
Generally, you need to use the vehicle more than 50% of the time for business to claim significant deductions. It’s important to note that regular employees who use their personal vehicles for work typically can’t deduct vehicle purchases, as the Tax Cuts and Jobs Act of 2017 eliminated this deduction for most employees.
Methods for Deducting a Car Purchase
The IRS provides several methods for deducting the cost of a vehicle used for business. The Section 179 deduction is a valuable incentive for small to mid-sized businesses, allowing them to deduct a large portion of the vehicle’s cost in the year of purchase, subject to certain limits.
Bonus depreciation is another option, allowing for additional first-year depreciation on top of the Section 179 deduction. It’s important to note that 100% bonus depreciation is being phased out.
The schedule is as follows: 80% for property placed in service in 2023, 60% in 2024, 40% in 2025, 20% in 2026, and complete phase-out by 2027. For vehicles that don’t qualify for Section 179 or if you choose not to use it, you can still deduct the cost through regular depreciation over several years.
Related: Self-Employed Worker Mileage Tax Deduction Guide
Limitations on Vehicle Purchase Deductions
While the tax code allows for generous deductions, there are limitations to be aware of. The IRS imposes “luxury auto limits” that cap the amount you can deduct each year, regardless of the vehicle’s actual cost.
For passenger vehicles placed in service in 2024, the maximum Section 179 deduction is limited to $12,400. If bonus depreciation is applied, an additional deduction may be available, subject to specific limits.
Vehicle weight is another factor; cars and small SUVs are subject to stricter limits than larger vehicles weighing over 6,000 pounds. Additionally, your deduction is limited by your percentage of business use – if you use the vehicle 60% for business, you can only deduct 60% of the eligible amount.
Special Considerations for Electric Vehicles
Business owners purchasing electric vehicles may qualify for additional tax incentives beyond standard vehicle deductions. The tax credit can significantly reduce the effective cost of an electric vehicle used for business purposes.
As of 2024, the Clean Vehicle Tax Credit offers up to $7,500 for new EVs and up to $4,000 for used EVs, subject to specific requirements, including income limitations and vehicle price caps
However, these credits have specific requirements regarding vehicle weight, manufacturer, and assembly location.
New vs. Used Vehicle Purchases
When it comes to tax deductions, both new and used vehicles can qualify. However, the amount you can deduct may differ depending on whether the vehicle is new or pre-owned.
Both new and used vehicles can qualify for Section 179 deductions, provided they meet the necessary criteria. However, with the phase-out of bonus depreciation, the advantage for new vehicles is diminishing.
Used vehicles, while still eligible for deductions, may not qualify for bonus depreciation but can still be written off through Section 179 or regular depreciation methods.
Financing vs. Outright Purchase
The method of acquiring your vehicle can impact your tax strategy. If you finance the vehicle, you may be able to deduct the interest paid on the loan as a business expense, in addition to depreciation deductions.
To qualify for interest deductions, the vehicle must be used more than 50% of the time for business purposes.
An outright purchase, while requiring more upfront capital, simplifies the deduction process as you don’t need to calculate and track interest payments. Regardless of your purchase method, it’s crucial to keep detailed records of all costs associated with acquiring and using the vehicle for business.
Related: Standard Mileage Deduction vs. Actual Expenses Method Explained
Record-Keeping for Vehicle Purchase Deductions
Accurate record-keeping is crucial when claiming vehicle purchase deductions. Keep all documentation related to the purchase, including the bill of sale, financing agreements, and receipts for any improvements or modifications.
Tracking your business mileage is equally important, as it determines the percentage of business use. Consider using a mileage tracking app like TripLog to automatically log your trips and categorize them as business or personal, ensuring you have reliable records for tax purposes.
Common Mistakes To Avoid in Writing Your Car Off as a Business Expense
One common mistake is overestimating the business use of a vehicle. The IRS requires that business use be substantiated with adequate records to support the deduction.
The IRS scrutinizes vehicle deductions closely, so it’s important to be honest and accurate in your reporting. Using a comprehensive mileage and expense tracking app like TripLog can be a great way to ensure all of your records are properly managed come tax time!
Another error is misunderstanding depreciation rules, particularly regarding luxury auto limits and bonus depreciation. These rules can be complex and change periodically, so it’s wise to consult with a tax professional or stay updated on current regulations to ensure compliance and maximize your deductions.
Related: 3 Reasons Why Your Small Business Needs An Accountant
Long-Term Tax Implications of Writing Your Car Off for Business
When writing off a vehicle purchase, it’s important to consider the long-term tax implications. Depreciation deductions continue for several years after the purchase, affecting your tax situation in future years.
If you sell the vehicle later, you may need to recapture some of the depreciation as income, particularly if you sell it for more than its depreciated value. Understanding these long-term effects can help you make informed decisions about when to replace your business vehicle.
Writing off Car Purchase on Your Taxes: Conclusion
Writing off a car purchase on your taxes can provide significant financial benefits for business owners and self-employed individuals. By understanding the available deduction methods, limitations, and record-keeping requirements, you can maximize your tax savings while staying compliant with IRS regulations.
Download TripLog on iOS or Android today to easily track your vehicle’s mileage and other deductible business expenses!
