TAX TIME: How can I deduct my car on my taxes?

It's that time of the year when everyone starts to think about what they will be getting back on their taxes and how they can save...

It's that time of the year and this is the time when everyone starts to think about what they will be getting back on their taxes and if they are really savvy, what they may need to do to maximize their tax benefits before the year is out. Recently, I had a conversation with a prospective client who asked if he could expense his SUV purchase on one of his businesses. The answer I gave him was similar to what he was finding during his research efforts online.... "It depends".

Prior to the tax year beginning in 2018, there were ways that W-2 employees as well as business owners could deduct expenses related to business use of their vehicle. While the Tax Cuts & Jobs Act (TCJA) had many beneficial revisions for businesses and investors, one of the changes effected W-2 only taxpayers. Starting January 2018, the TCJA disallowed the deduction allowing taxpayers to itemize mileage related to using the car for work.

So what does this mean? It means, if you want to deduct your car on your taxes, you need to have a business. This does not mean that if you have a business, you can deduct 100% of your vehicle and its expenses; but if it is reasonably associated with the business and its dealings, it's deductible!

What qualifies a vehicle as tax deductible?

First thing to note, is the vehicle must be used for business purposes. If it is used for both business and personal purposes, you will have to allocate the percentage of business vs. personal use when determining your expense amount.
Business includes direct and indirect business dealings. Direct dealings are those that require use of the vehicle for activities directly associated with revenue or sales for the business. For example, if you are a photographer, going to a photography engagement is a direct expense that is deductible. Indirect dealings are support tasks that are required to effectively operate the business. An example would be picking up supplies or going to a photography class. While not directly associated with making a sale, it is a necessary task of operation and is considered an indirect expense that will still be tax deductible.
It is documented. There are so many apps out there that help you track your mileage (and expenses) if the vehicle isn't exclusively used for business. However, good ole pen and paper still does the trick. Keep a log, receipts, and other records on the expense and its business purpose.

How do I figure out what is deductible?

There are a few ways you can benefit from a vehicle you use for business.

You can Section 179 it (or use bonus depreciation), which simply means take the expense of the vehicle in its entirety during the year it's instated. As long as the vehicle expense is not greater than your revenue and within the limits of the bonus depreciation amounts, you may be able to write the WHOLE thing off.
You can depreciate it which means you take a portion of expense in each year for the subsequent 5 years.
You can take a standard mileage deduction based on the miles you drive for business times the standard government rate per mile. If you select this option, you cannot expense the actual expense.

In addition to the above, if you elect actual expenses, the following items are deductible:

Gas and oil
Tires
Repairs and maintenance
Insurance
Registration fees

Which way is the best, Chelsey?! I can't quite answer that since every situation and each person's goal is different. But this will at least give you a starting point for discussion. If you have any questions and want to explore more, please join our monthly coaching group for more detail on different tax strategies or schedule a one-on-one consultation to see what method best work for you. Let's get a jump start on strategizing to create the most effective tax plan for you.

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Categories: : Tax Tips, Vehicles, Deductions