Cars are expensive to own, but if you own a business you can potentially write off your expenses. In some cases, you may even be able to write off the whole, but there are a few different stipulations. Let’s take a closer look at writing off your car for a business.
The car must be used for business purposes
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When writing your car off for business use, the primary rule is that it needs to be solely used for business purposes. According to LYFE Accounting, “if there is no business purpose for your car, you cannot deduct it as a business expense.” That means that the use of your car should help you to conduct your business. For example, if you use your car to transport goods, people, or yourself to other places of business.
On that last point, you must use the car for business travel. This is when you drive from one business location to another business location. In that case, driving to a business location from your house doesn’t count because your point of origin is a residential address. However, if you drive from your place of business to a restaurant to conduct a business meeting, then that would qualify.
Step 1: Find the business use percentage of your vehicle
When it comes to actually writing off your car for business use during tax time, the first step is to find the business-use percentage of your vehicle. In order to do this, you can divide the business miles on the vehicle by the total miles driven.
For example:
5,000 (business) miles / 10,000 (total) miles = 50%
To explain, if you drove 5,000 miles for your business and there are 10,000 total miles on the car, then you can possibly deduct up to 50% of your car as a business expense.
Step 2: Choose a vehicle tax deduction method
There are two different methods to use when deducting the business use of your vehicle. There is the “standard mileage method” and the “actual expense method.” For the standard mileage method, you can account for all of the business miles you have driven for the tax year and multiply it by the standard mileage rate. Since the standard mileage rate in 2022 is 58 cents, here is an example:
10,000 (miles driven in tax year) X 58 cents = $5,800 vehicle tax deduction
As for the actual expense method, you take all of your vehicle expenses and multiply it by the business use expenses to find the vehicle tax deduction.
For example:
$15,000 (vehicle expenses) X 50% (business usage) = $7,500 (vehicle tax deduction)
Some eligible vehicle expenses include gas, oil changes, insurance, and other repairs.
Step 3: Pick a depreciation method
According to LYFE Accounting, “when you buy a car, the money you pay is not considered an expense because you will likely use that car over multiple years.” In that case, you must calculate the depreciated expense associated with your car. To do so, there are a couple of different methods.
The first method is called “straight-line depreciation,” which deducts the depreciation of your car evenly each year. This means that if you purchased a $50,000 and it has a 5-year useful life, then you can technically deduct $10,000 per tax year.
The other method is called the “declining balance depreciation method,” which allows you to deduct more of the car’s depreciation in the first year. The math works out like this:
$50,000 (vehicle cost) X 200% (declining balance depreciation) = $100,000 (total vehicle cost)
Then you may be able to deduct a lot of that cost in the first year of ownership as the math works out like this:
$100,000 / 5 (years of useful life) = $20,000 (vehicle tax deduction)
This means that you can deduct up to $20,000 for your vehicle in the first year. But it also means that you’ll have to deduct less in the years following.
Writing your car off as a business expense
Writing your car off as a business expense is a possibility as long as you adhere to the tax guidelines. If you’re not sure if you write your car off, or if you would rather not deal with all of the math, then we suggest finding a tax accountant to help you out.
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