INDIVIDUAL TAX | 06/05/2024
Business vehicles can be crucial for your company’s operations, but the costs of purchasing and maintaining a company car can be substantial. For small- to medium-sized business owners, buying a vehicle for business use can take up a significant portion of the annual budget.
To offset some of these expenses, you might consider filing for a business vehicle tax deduction. These deductions can help you recover some or all of the costs associated with purchasing and operating a vehicle, depending on the types of deductions you qualify for. However, the complex rules and regulations can make it challenging to navigate the process and determine eligibility.
Can I Write Off My Car Purchase as a Business Expense?
Section 179 of the U.S. Internal Revenue Code offers a specific type of business vehicle tax deduction. This provision allows business owners to write off part or all of their vehicle purchase during the tax year the vehicle is put into service. While there are limitations, this deduction can significantly reduce the financial burden of a car purchase.
To qualify for the Section 179 deduction, you must demonstrate that more than 50% of the vehicle’s annual use is for business purposes. This requires meticulous record-keeping of its use and expenses. Documentation is crucial for any business vehicle tax deduction, and the IRS provides a comprehensive list of rules to help you determine your eligibility.
Methods for Deducting Costs of Business Vehicle Ownership
If you already own a business vehicle, you can deduct operating and ownership expenses annually. The method you choose will depend on your specific circumstances, including the type of vehicle and how you use it. It’s wise to calculate each method separately to see which offers the most savings.
The first method is the standard mileage rate. To use this method, you must choose it in the first year the vehicle is used for business. You can switch methods in later years if needed.
Using the current standard rate, you calculate your deduction based on the vehicle’s annual mileage. However, there are several limitations:
- You cannot use the standard mileage rate if you use five or more business vehicles simultaneously.
- You have claimed a depreciation deduction using a method other than straight-line depreciation.
- You have claimed a Section 179 deduction or a special depreciation allowance on the vehicle.
- You have used the Modified Accelerated Cost Recovery System (MACRS).
- You have claimed actual car expenses after 1997 for a leased vehicle.
If your vehicle doesn’t qualify for the standard mileage rate, you can still opt for the actual car expenses deduction. This method requires detailed record-keeping but allows you to deduct a broader range of expenses, such as depreciation, licenses, fuel, oil, tolls, lease payments, insurance, parking, registration fees, repairs, and tires.
While there are rules and exceptions to what can be deducted, the actual car expenses method provides more flexibility and allows you to claim a Section 179 deduction. It also offers more options for calculating depreciation and special depreciation allowances.
Business Vehicle Tax Deduction Limits and Exceptions
Although you can recover some or all of your vehicle-related expenses, certain limitations might restrict the benefits. For instance, Section 179 deductions are capped at $1.08 million. While this might not affect small businesses with one car, it could impact companies with a fleet of vehicles.
Additionally, there’s a deduction limit for SUVs. SUVs weighing over 6,000 pounds have a deduction limit of $27,000. This is particularly relevant for businesses considering electric vehicles (EVs), as the added weight of newer, larger EVs might limit potential savings.
These are just a few key limitations to consider when exploring business vehicle tax deductions. Make sure to review the rules outlined in IRS Publication 463 before filing to ensure compliance and maximize your deductions.