Buying a new car is a giant expenditure. More likely than not, you’ll be planning to use your new vehicle for personal and business purposes.
The IRS took that into consideration when they made the rules for deductions on new cars you purchase for business. If you are looking to buy a new or preowned car to use for your business, pay close attention.
In this article, we will go over how to save money on your tax bill when you purchase a new car.
First and foremost, you can’t technically write-off the entire purchase of a new vehicle. However, you can deduct some of the cost and other expenses from your gross income to lower your tax bill.
Section 179 of the United States Internal Revenue Code, allows a taxpayer to write-off the cost of certain types of property on their income taxes as an expense. Usually, the IRS requires the cost of the property to be capitalized and depreciated
To qualify for Section 179, any vehicle, new or used, must be financed and used by the business before December 31 and must be used at least 50 percent of the time for business. It should be noted that you can only deduct the percentage of the cost equal to the percentage of business use.
Form 4562 Section 179 takes into account the depreciation use of company machinery, vehicles, furniture, and other property listed either purchased or financed.
The special depreciation allowance deducts a 100% of value (up to $1,000,000) for qualified items. There’s a good reason why the government allows you to deduct the full purchase price from your gross income on the year you bought the item.
Before, when a business purchased an item that qualified as a write off, you would only be able to write off a portion of the cost every year. Section 179 allows businesses to write off the entire purchase price of qualifying equipment for the current tax year. Business owners would much rather deduct the cost of the expense for the year they buy.
Section 179 was designed to be an incentive for businesses to buy equipment and invest in themselves.
You get a nice little perk called bonus depreciation after the Section 179 spending cap is reached. The code lets business owners deduct a set dollar amount of new business assets, and bonus depreciation lets them deduct a percentage of the cost after.
Therefore, it is useful to very large businesses spending more than whatever Section 179’s spending limit is for that year because they can still reduce their taxes with bonus depreciation. The bonus depreciation is available for both new and used equipment.
In short, this special deduction permits you to deduct a giant portion of the entire cost of the vehicle in the first year you use it (if you are using it primarily for business purposes!).
There are two IRS-approved methods for deducting car expenses are: actual car operating expenses or the standard mileage rate. You can find both deductions on your form Schedule C. When choosing between the two methods, you must decide which is best for your business since both can’t be used.
Actual operating expenses are costs such as gas, miles, insurance, repairs, and maintenance (oil change, tire rotation).
Although those expenses may not seem like a lot, the total costs can add up quickly. We highly recommend you use an expense tracker app to keep receipts and mileage logs throughout the year.
The standard mileage rate is a rate determined by the IRS that a taxpayer can use to write off per mile driven for business purposes. Tracking your miles for taxes will work in your favor if you are constantly on the go.
Here is an example of what we mean. The standard mileage rate in 2019 was .58 cents per mile. If you drove 6,000 miles for work, all you have to do is multiply that by .58 cents. This will give you a total tax write-off of $3,480.
Pretty sweet, right?
When you finance a new vehicle, you cannot deduct the entire monthly expenses from your taxes. However, the interest charge being collected from every payment can be written off. For example, if the car is used 80 percent for business, then 80 percent of the lease payment can be deducted.
Enter the amount of interest on form Schedule C to take this deduction as a business expense.
You can write off sales taxes paid on the new car or the income taxes paid for the year with a Schedule A form, an income tax form that you use to report your tax-deductible expenses.
You have to select one option because you can’t take both.
The Schedule A form also has other write-offs for your tag registration (property tax). On this tax, however, you can’t use the total purchase of the tag. What you will be deducting is the ad valorem tax, a tax whose amount is based on the value of a transaction or of property, which takes the place of sales tax on vehicle registration. Your deduction of state and local income, sales, and property taxes is limited to a total deduction of $10,000.
When you purchase a new car, keep a record of the sales tax. The IRS has a helpful tool to assist you.
You can start reaping the reward of a new vehicle by saving money on your tax return. Take notes from the time of purchase until the end of the year for your business use. Pretty simple, right? Your new shiny dream just turned into a money saving machine
Keeper finds tax deductible expenses among your purchases ... automatically! Save $1000s a year claiming the tax write offs you’re eligible for as a contractor.