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You've heard it a hundred times: That shiny new car your buddy
just bought? It doesn't really cost him anything. He writes off
the car as a tax deduction.
Your first thought is usually, "That can't be right." Your
second thought is, 'I got to figure out how to enjoy that
loophole."
But what does the law say? And what are the rules for writing
off vehicles? It turns out that you can write off the cost of
buying and using a car if you're self-employed and use your
vehicle in your business. Specifically, you can probably deduct
the business portion of your vehicle expenses on your business
tax return.
But this deduction is trickier than most people realize. Here's
the first big thing that goofs many people up. You need
substantiation to prove your business use. Ideally, in fact, the
Internal Revenue Service wants you to keep a log of your
business miles, your commuting miles, and your personal miles.
With this information, you can then either deduct an amount
equal to the business miles times a standard per-mile rate of
roughly $.35 or $.40 a mile (depending on the year)... or you
can deduct the percentage of your vehicle expenses equal to the
percentage that your business miles represent.
Note that only your business miles--and not your commuting miles
or personal miles are deductible.
For example, if your business use equals 5,000 miles, personal
use equals 3000, and commuting equals 2000 miles, your total
miles for the year equal 10,000. Business miles as a percentage
of total miles equal 50% because 5,000 divided by 10,000 equals
.5 or 50%.
In this example, you could therefore deduct 50% of your fuel,
50% of your insurance, 50% of your maintenance and repairs, 50%
of the car loan interest, 50% of the depreciation, and so on, as
a business deduction. This means you can't ever deduct all the
costs of owning and running vehicle--only the business use of a
vehicle.
If you don't have exact records about your business use, you can
sometimes use good sampling. For example, if you keep a good
appointment calendar of your business activities, one popular
tax reference suggests that you can look at the total business,
personal and commuting miles driven during one week each month.
Then, you can average this data to get good weekly estimates of
your business, personal, and commuting miles. Finally, you can
multiple these weekly estimates by 52 (the number of weeks in a
year) to get reasonable estimates of your business, personal and
commuting miles.
But before you go out and buy a new luxury auto, you need to
know there's another complication. Congress limits in most cases
the amount of depreciation or lease rental that you can include
in your vehicle expense calculations. The rules are a bit
tricky, but essentially, for purposes of vehicle depreciation
and lease payments, you only get to look at the first $17,000
(roughly) of vehicle cost. In other words, if you buy a $60,000
vehicle and your friend buys a $15,000 vehicle, you may both
have the same business depreciation expense--even though your
vehicle costs four times what your friend's does.
One other related point: You may have heard about the sport
utility vehicle loophole. This SUV loophole really does exist.
Specifically, the luxury auto limits mentioned above don't apply
to sport utility vehicles that weigh more than 6,000 lbs. Note
that Congress partially closed that loophole in 2004, however,
by saying that a special, super-accelerated form of depreciation
called Sec. 179 depreciation can't be used to write off all of
the cost of an expensive SUV in the year the vehicle is
purchased.
About the author:
Redmond WA CPA & author
Stephen L. Nelson is an adjunct tax professor for Golden
Gate University's graduate tax school.
Written by: Stephen L. Nelson, CPA
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