November 29th, 2022
While performing bookkeeping or filing your taxes, as a business, you should be writing things off to lower your taxable income. Many people are aware that vehicles can be written off for business use, but let’s dive into the actual requirements of how to deduct vehicles for the business use with the IRS.
Per the IRS, if you use your car only for business purposes, you may deduct its entire cost of ownership and operation (subject to limits discussed later). However, if you use the car for both business and personal purposes, you may deduct only the cost of its business use. This does not include vehicles used as equipment, such as dump trucks, or vehicles used for hire, such as taxis.
There are a few different ways you can deduct vehicle use for your business, but first, let’s talk about a Sole Proprietorship or self-employed.
Now, there are two ways to calculate the amount of your deductible car expense.
1/ The first way is the Standard Mileage Rate. To use this calculation method, you must own or lease the car.
There are also a few things you cannot do:
- Operate a fleet
- Claim a depreciation deductible on the car
- Claim a section 179 deductible on the car
- Claim a special depreciation allowance,
- Claim actual expenses after 1997 for a car you lease.
For the current mileage rate, refer to Publication 463.
2/ Another method would be Actual Expenses. To use this method, you must determine what it actually costs to operate the car for business use in proportion to the total use of the car.
Actual expenses could include: gas, oil, repairs, tires, insurance, registration fees, licenses, and depreciation (or lease payments) attributable to the portion of the total miles driven for the business.
Expenses such as parking fees and tools would not be calculated in this method, but rather, a separate deductible.
According to the IRS, the Modified Accelerated Cost Recovery System (MACRS) is the only depreciation method that can be used by car owners to depreciate any car placed in service after 1986.
However, if you used the standard mileage rate in the year you place the car in service and changed to the actual expense method in a later year and before your car is fully depreciated, you must use straight-line depreciation over the estimated remaining useful life of the car.
There are limits on how much depreciation you can deduct. To explain, depreciation is the amount that you can deduct over time for the general wear and tear of the vehicle.
In this instance. per the IRS’s new revenue procedure Rev. Proc. 2022-17, the maximum first-year depreciation write-off is $11,200 for passenger automobiles placed in service during the calendar year 2022, plus up to an additional $8,000 in “bonus” depreciation, if applicable.
S-Corporation and C-Corporation
Whether the vehicle be owned by an employee or by the company, will determine how the vehicle is deducted. If an employee uses a personal vehicle for business use:
- The employee can submit a request for reimbursement to the corporation.
- The corporation can then reimburse the employee based on the standard mileage rate.
- The corporation gets a deduction for vehicle expenses paid.
- The reimbursement is not reportable as taxable income to the employee.
For a vehicle used by an employee that is owned by the company:
- A corporation must determine the deduction for vehicles it owns based on actual operating expenses. The corporation is also limited by the business-use percentage of the vehicle.
- The corporation can deduct all of the operating expenses of the vehicle without regard to the business-use percentage, if the personal-use percentage is treated as income to the employee.
- This is typically the case when you get the use of a company car as an employee benefit.
- The corporation’s deduction for the personal-use percentage is treated as a compensation expense.
- The employee’s income for personal use of a corporate vehicle is determined based on the market value of the vehicle, not on the actual or standard method used to determine the deduction of the cost to rent a vehicle, for example.
The only difference from how corporations can write off vehicles is that a partner/member who has unreimbursed auto expenses as a requirement of the partnership/LLC agreement can typically claim the deduction on Schedule E of Form 1040 rather than on Schedule A.
Don’t take it for granted. You must have a vehicle, so use it to your advantage!
It is important that you understand what your capabilities are per IRS standards to maximize your write-offs. If you are still unsure, reach out to an accountant for help.
We hope this helps to make your process just a little bit easier!
Even though we are based in Albany, NY, we offer our expertise in business accounting, bookkeeping, and tax preparation all across the United States.