Can I Write Off My Car Payment From My Taxes?
Many freelancers and business owners practically live in their cars. Unless you only work out of your home office, you might be doing a whole lot of driving for your business. It's natural to think that you have the ability to use your car payment as a business expense. However, car loan payments and lease payments are usually not fully tax-deductible. Instead, you have some other options that can often yield more tax savings. This article will break the confusion around the question "can I write off my car payment?".
Let's discuss three different scenarios that may apply to you:
Scenario 1: I own my vehicle and have a monthly loan payment.
The majority of freelancers or small business owners will fall under this scenario. Under this scenario, you are not able to write off your car payment. Instead, you may be able to write off a portion of the interest that you pay on your auto loan. There are two methods that the IRS allows to calculate this write off:
1) The Standard Mileage Deduction Method
Under this method, you do not deduct any vehicle expenses or gas purchases. Instead, you keep records of the business miles driven through a business mileage log. To calculate your tax deduction, you add up all of the business miles and multiply it by the standard mileage rate.
Pro Tip: Commuting miles are not tax deductible. Commuting miles are miles driven to your regular place of business like your co-working space or office.
As an example of how the standard mileage deduction works, let's pretend I'm a self-employed personal shopper who has to visit her clients for styling appointments. These client visits totaled 5,000 miles in 2020. To calculate my write off, I take 5,000 and multiply it by the IRS standard mileage rate, which was $0.575 in 2020. That yields a tax deduction of $2,875.
You can see how the standard mileage rate is a much sweeter deal than simply just deducting gas purchases. In this example, if gas in my area averages $3 per gallon and my car gets 30 miles to the gallon, my gas expense for 5,000 miles driven would have only been around $500. Therefore, I elect to have the $2,875 write off instead!
You will enter this tax deduction on Schedule C of your tax return, or let Keeper Tax do the heavy lifting for you.
You can also deduct a portion of the interest expense that you pay on your automobile loan. For example, if you use your car 60% of the time for business, you can deduct 60% of the interest paid during the year.
In my opinion, this method is best for freelancers and self-employed individuals because it typically yields the most in tax savings and is easy to implement.
2) The Actual Expense Method
Under the Actual Expense Method, you will deduct all of your car expenses that were directly related to business activity. Many times, if your vehicle is available for both personal use and business use, you will have to prorate expenses in accordance with the percentage that you deem as a business. Sounds complicated, I know.
Some of these expenses that you may have to consider prorating include registration fees, car insurance, oil changes, and other operating costs. Therefore, you will still have to maintain a mileage log because you need to know the total business miles driven to be able to support the percentage of your vehicle that you claim as business use.
However, with the right organizational tools in place, using this method will be a breeze! Consider an expense tracking software to keep all of your tax write offs organized.
Similar to the Standard Mileage Deduction Method above, you can deduct part of the interest you pay on your automobile loan. You will use the same proration as above and apply it to your loan interest paid during the year.
Another benefit to the Actual Expenses Method is that you are able to deduct depreciation on your vehicle. This can be a very large tax deduction if your car is deemed to be 50% or greater business use. On top of that, you can write off parking fees and oil changes as a deductible expense.
However, consider your long term plans. If you are going to sell your vehicle in the near future, keep in mind that you may have to recapture a portion of that depreciation as a gain on the sale of your vehicle. What does this mean? More taxable income. AHH! That's more frightening to a tax accountant than seeing a real-life ghost.
When deciding on using the Standard Mileage Deduction Method versus the Actual Expense Method, you can calculate your tax deduction using each method and see which method yields the most in tax savings. It may also make sense to talk to a tax professional for more specific tax advice.
Scenario 2: My business owns my vehicle and has a monthly loan payment.
If your small business owns your vehicle, meaning the loan is in your business's name, the monthly payments will likely be paid directly from your business's bank account. Likely, this will be the case if your vehicle is used for 100% business purposes, like a company car or business vehicle.
Using this fact pattern, you can deduct 100% of the interest portion of your car payment as a business write off. You can also use the actual expenses method described above to deduct other operating expenses of car ownership.
Scenario 3: I lease a vehicle and have a lease payment.
If you lease your vehicle, you can elect to use either the Standard Mileage Deduction Method or the Actual Expense Method described above.
If you use the Actual Expense Method, you can deduct the part of each lease payment that is deemed as the business use percentage of that vehicle. For example, if my car is deemed to be 60% business use and my lease paymet is $500, I can write off $300 per month. Therefore, the Actual Expense Method may yield the most in terms of car tax deductions if your lease payment is
However, if your leased vehicle has a fair market value upon lease (i.e. sticker price) greater than $50K, there may be additional tax implications that are not so fun to deal with. If you fall into that camp, you may want to speak to a tax professional about expense deductions before writing off your lease payment.
The Bottom Line
While writing off your entire car payment is simply not an option, there are other vehicle write offs that you can take advantage of as a self-employed taxpayer. While I advise most of my clients not to go buy that shiny new car for the tax benefit alone, there may be tax deductions that can lessen the burden of your car payment.