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Do you use your personal vehicle to run errands for your business or to visit clients? If so, did you know that using your car for business could have some tax benefits?Many people wonder how to write off a car. In this article, we’ll explore how your taxes and your car can connect and provide tips to help you ensure that you keep the kind of accurate records the Internal Revenue Service (IRS) requires. We’ll also look at the smartest ways to buy a car to use for personal and business activities.Recommended: Is Car Interest Tax Deductible?
Why Might You Use a Personal Car for Business?
Maybe you’ve never even considered driving your personal car for business use. Maybe you would like to do it, but you thought you had to buy a separate vehicle to use for your company. Bottom line: If you are using a car for such business purposes as buying supplies, visiting clients, job site visits, business errands, or attending trade shows, your personal car meets the definition. (On the other hand, if you need a specialized vehicle like a tow truck or a semi for your work, your personal car most likely won’t do the job.)Using your personal car for business can save you the cost of having to buy another vehicle. You don’t have to worry about where to keep it, since it already “lives” at your house. And on top of all that, there are some tax benefits.
Can You Deduct Car Expenses When Using a Car for Business?
If you’re using a car for business purposes, some of the expenses you incur are tax deductible. The trick is knowing which expenses are considered qualified expenses for your business.Because you can only deduct expenses related to the operation of the vehicle for business use and not personal, it can get a little tricky. That’s why there are two ways you can deduct expenses. The first is by using the standard mileage rate set by the IRS. Keep track of the miles you drive for your business and multiply that times this year’s rate to get your tax deduction.The other option is to keep track of all expenses you incur with the car and then use the number of miles driven for business versus total miles driven for the year to get the deductible portion.
Deductible Expenses
So what are the small business tax deductions you can write off if you’re using your own car for business use?Things like car maintenance and repairs, oil changes, gas, tires, licenses, registration, and depreciation are all deductible expenses. You can also deduct parking fees and tolls, even if you use the standard mileage rate.
Nondeductible Expenses
The expenses incurred while using the vehicle for personal errands or trips aren’t deductible. So if you take a road trip for fun, you can’t write off the gas for the trip.Also, you can’t deduct your miles from home to work, as that’s considered a personal expense.To summarize, you can only write off expenses for the time you’re using the car for business.
Other Considerations
If you’re using your car for business, there are a few other things to consider.
Depreciation
Over time, cars depreciate in value. You might have bought a car for $20,000 10 years ago, but only be able to sell it for $5,000 today. The IRS allows you to depreciate a car used for business. However, note that you must be using your car for business at least 50% of the time to qualify for depreciation.There are two methods for calculating depreciation, the straight line method and the declining balance method. Talk to your accountant to determine which is a better option for your tax situation.
Recordkeeping
The IRS can get pretty strict about checking financial records if any discrepancies or red flags pop up. The best thing you can do to prevent an audit (or make one go smoothly) is to try hard to keep accurate records.
Incomplete Record Tips
Make sure to record all miles you travel for business. There are apps that will track this on your phone. You’ll need to note the starting mileage at the beginning of a new year in case you need to compare business miles to total miles driven.Also, keep receipts from car maintenance visits, tire purchases, gas, and registration, and enter them into your accounting system under the appropriate category.
Employees Driving Company Cars
Another consideration is if your employees use their own cars for company activities, such as driving from one client to another or running errands for the company. Keep in mind you may be liable for them and their cars during business hours, depending on laws in your state.Employees may be able to claim deductions for the miles they drive their own cars for business, and many employers reimburse employees for those costs, often on a per-mile basis.Just like when you use your personal car for business expenses, employees can only claim deductions for the portion of the miles driven that are for business, so they’ll need to record those miles.
Qualifying for the Standard Mileage Deduction
If you’d rather use the standard mileage deduction (it may be simpler than keeping track of all your business-related vehicle expenses), you must meet certain criteria, according to the IRS.You can’t operate five or more cars at the same time (like if you have a fleet of delivery vans). You can’t have claimed a depreciation deduction for the car using any method other than straight-line, and you can’t have claimed the special depreciation allowance on the car.You can’t have claimed actual expenses after 1997 for a car you lease. And you can’t have claimed a Section 179 deduction on the car, which is an immediate deduction rather than depreciating expenses over time.To employ the standard mileage rate deduction, you must use it in the first year you have the vehicle for your business. After that, you can use the standard mileage rate or actual expenses for deduction.
Current Standard Mileage Deduction Rate
The IRS regularly updates its standard mileage deduction rate, so check to see what it is in the year you’re filing your taxes.For 2022, the rate is $.585 per mile driven for business use. To calculate how much you can deduct for your personal car being driven for business purposes, multiply that amount times the number of miles you drive for your company.
Standard Mileage Deduction vs Actual Expenses
The IRS offers two ways of calculating the cost of using your vehicle in your business: the actual expenses or the standard mileage rate method. You can’t do both.If you want to go the actual expenses route, track what you spend on your car, including lease payments, depreciation, repairs, oil, gas, new tires, and maintenance. For example, if 40% of your driving is for business, multiply your expenses by 40% to get your write-off. According to the IRS, “You can generally figure the amount of your deductible car expense by using one of two methods: the standard mileage rate method or the actual expense method. If you qualify to use both methods, you may want to figure your deduction both ways before choosing a method to see which one gives you a larger deduction.”
Where Do You Deduct Business Vehicle Expenses?
We can go a little deeper into how to write off a car. Now that you’re on top of recording business-related vehicle expenses, where do you actually get your deduction for using a car for business purposes? If you work with an accountant, she’ll handle it. You’ll just need to provide your receipts for vehicle expenses if you’re claiming actual expenses, as well as your total and business-related mileage.If you file your own taxes, you’ll record this information on your Schedule C (Form 1040). Line 9 allows you to input expenses for cars and trucks. Section IV of the form will ask you questions about your business use of the car, including:
When you first used the vehicle for business purposes
How many of the total miles were business-related
Whether the vehicle was available for personal use during off-duty hours
Whether you or your spouse have another vehicle available for personal use
Whether you have evidence to support your deduction
What Expenses Can You Deduct if You Borrow a Vehicle for Your Business?
Think borrowing a car disqualifies you from deducting vehicle expenses? Wrong. Driving any car for business entitles you to deduct expenses like maintenance and gas, though you cannot deduct depreciation because you don’t own the vehicle.
Can You Deduct the Purchase of a Vehicle for Your Business?
It sounds appealing — write off the cost of the car on your taxes. But there are some strict rules about this, and whether you’re buying a vehicle for a small business or a large one, you need to learn the ins and outs.
Section 179 Deductions
The IRS Tax Code Section 179 permits businesses to write off qualifying vehicles as business tax deductions.
Section 179 Requirements
Any business that purchases, finances, or leases business equipment in 2022 (spending less than $3,780,000) should qualify for the 179 deduction. Qualifying purchases include tangible goods, off-the-shelf software, and business vehicles. To qualify for the deduction, you must purchase and place your new vehicle into service between January 1, 2022 and December 31, 2022.
Section 179 Limits
If you use your vehicle for business reasons for more than 50% of the time but less than 100% of the time, you may have a limited total deduction of $11,160 for cars and $11,560 for vans and trucks. Confirm this with an accountant.
Pros and Cons of a Business Buying a Vehicle
How to buy a car through your business? If you’re considering using a personal car for business, it’s important to consider the benefits and drawbacks.
Pros of Using Your Own Car for Business
Having one car for two purposes saves money. If you use a car for work and then after work for personal errands, and don’t need more than that, why pay for two separate vehicles?We’ve covered the tax deductions you can take advantage of. They’re a huge perk of using a car for business and pleasure, and can reduce what you pay in taxes.Another benefit is that your company can cover some of the costs of maintaining and repairing your vehicle. This means less out-of-pocket expense for you personally.
Cons for Using Your Own Car for Business
On the other hand, using any vehicle is an added expense for your business. If funds are tight, this may not be an expense you can afford, especially if you’re helping to cover large repair costs or registration fees.You’ll also have the headache of tracking miles for business. It’s easy to forget to turn on your tracking app or check the odometer, and then you’ll miss out on those mileage deduction opportunities!
Ways to Fund the Purchase of a Personal Car for Business
Many people wonder, “Can I deduct the purchase of a vehicle for my business?”If you’re considering buying a car that you’ll use for business and wonder if you should purchase it through your company, the first question to ask yourself is: Will the vehicle be used only for business? If not, if you plan to use it for personal activities as well, it’s better to buy it yourself than through your business.Even if you buy the car yourself, you can still deduct those business-related expenses or claim your standard mileage rate.If you don’t have the cash to pay for a car in your personal checking account, you may qualify for a car loan.
A Word on Refinancing a Car Loan
If you already own a car and are considering the pros and cons of refinancing a car, consider your reasons for wanting to refinance it. Are you able to get a lower rate and/or save money by refinancing? Are you struggling to make large monthly payments and looking to extend your loan period so you can reduce those payments? Is your car still worth more than you owe?These are all situations where refinancing a car loan — whether it’s for personal, business, or both — can be smart. Interest rates rise and fall, so you may be paying far more than you need to on an old loan. If your credit situation has improved since you first took out the loan, you may also qualify for a lower rate. Use an auto loan refinance calculator to find out where you stand.Before moving forward with car loan refinancing, consider the total cost to refinance a car. You may have to pay an early termination or transaction fee with the old lender, as well as registration or title transfer fees when the loan is approved. If the fees are less than what you’ll save, by all means, consider refinancing.
Auto Loan Refinancing Rates Today
Using a car for business and personal activities can be a smart move for many entrepreneurs. Get help finding auto loan refinancing so you may look to save money that way as well.
Frequently Asked Questions
How can I buy a car for business use?
Where do you deduct business vehicle expenses?
What expenses can you deduct if you borrow a vehicle for your business?
What is the current standard mileage deduction rate?
Tax Information: This article provides general background information only and is not intended to serve as legal or tax advice or as a substitute for legal counsel. You should consult your own attorney and/or tax advisor if you have a question requiring legal or tax advice.
Photo credit: iStock/AzmanL
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About the Author
Susan Guillory
Su Guillory is a freelance business writer and expat coach. She’s written several business books and has been published on sites including Forbes, AllBusiness, and SoFi. She writes about business and personal credit, financial strategies, loans, and credit cards.
