If you are a business owner who travels in a private car to meet customers or pick up goods, then you should take a tax deduction for the commercial use of your car.
Can you deduct tax for the commercial use of your car?
Self-employed people can get a business tax deduction for using a private car to start a business. Tax deductions reduce your taxable income, thereby lowering your tax bill. The auto tax deduction is proportional to the commercial use of your car. While you can and absolutely should deduct the cost of travel to visit a client’s website, the IRS doesn’t issue a deduction for business owners who drive their kids to softball practice. The amount of the deduction depends on the type of vehicle, the purchase price and its use in the business. There are two ways to calculate the car tax deduction: the actual cost method and the standard mileage rate method.
How to Qualify for the Commercial Vehicle Tax Deduction
If you can tick next to these three qualifications, you can deduct the commercial use of your personal vehicle.
- You are self-employed
You must be self-employed to eliminate the commercial use of your car. Prior to the Tax Cuts and Jobs Act (TCJA), employees were also able to deduct unpaid business expenses, including business mileage for personal Cadillac Escalade Gross Vehicle Weight. Now, motorists rely on pay per click from their employers. I’m going to choose S corps for this article, but that’s not personal. Scorp owners who are classified as employees cannot write off auto tax like sole proprietors. Instead, write your Scorp reimbursement check to your personal bank account for business use on your personal car. You can use either method when the name of the car is in your name.
- You or your business lease or own a car
You can’t deduct a car you don’t own or rent. Make sure the car’s name is your name or your company name. If you do not plan to use the car for personal reasons, especially if you are an S corp owner, only keep the car in your company name. Driving a commercial vehicle for personal purposes is considered a taxable fringe benefit and may offset the benefits of the auto tax deduction. Also, you can only deduct car expenses using the actual expense method when the car is in your business name.
How to Get a Tax Deduction for Your Car’s Commercial Use
You can choose between two methods to deduct your car for commercial use. You will face limitations if you switch methods, so choose wisely.
- Determine the commercial use of your car
Allocate a percentage for personal and business use of your car based on mileage. For the IRS, commuting counts as personal miles. The best way to track mileage throughout the year is to use a mileage tracking app such as Fresh books Mobile, or to take an odometer and record mileage in a spreadsheet before and after a business trip.
- Determine standard mileage deductions
- The standard mileage deduction formula is:
- Standard mileage deduction = (business mileage ✕ IRS standard mileage rate) + non-commuter parking + toll
- The IRS standard mileage rate changes every year. $0.575 in 2020.
- Becky’s standard mileage deduction is $17,250 (30,000 business miles ✕ $0.575 IRS mileage rate). She did not pay for parking or tolls.
- Determine the actual cost deduction method
Next, calculate the actual cost of your vehicle for the year. Include these fees:
- Registration fee
- Depreciation or lease payments
- Parking not related to commuting
Note on discount and payroll: Remove the discount for the car you own, and deduct the rental fee for the paid cars. You can get rid of the downside for a paid car through credit.
Can I write off my car payment?
You can write off your rental car payment when you select the Actual Charge method. You cannot record your monthly mortgage if you are giving a car loan. Instead, reduce the value of your car to the annual limit. Tax software or a tax professional can help you estimate the cost of your car.
Can I deduct the cost of purchasing a vehicle for my business?
It sounds like a joke, but it’s not: Depending on the weight of your car, you may be eligible for a 100% tax deduction for buying a business-only car. Cars with a GVWR between 6,001 and 13,999 pounds are eligible for a 100% depreciation bonus. In other words, buying a Cadillac Escalade for $80,000 has a 100% deductible in the year of purchase, plus bonus depreciation. Most large SUVs qualify for a 100% deduction. Lighter cars are not eligible for the 100% first-year deduction, but you can deduct a substantial portion of your new car purchase through Section 179 for Cadillac Escalade with the annual deduction for cars and trucks.