Are you using or planning to use a vehicle for your business? The cost of using a vehicle for your business is a valid tax deductible expense for your business. Knowing the basics of tax rules on company cars can help you maximize your business tax deductions. And VinAudit’s market value tool (free for personal use) and market value API (bulk business service) can help you understand the business vehicles’ current market value in your tax calculation.
Here are the most frequently asked questions on tax rules for business vehicles:
What qualifies as a business vehicle or a company car?
A car, pickup truck or an SUV that is used in the regular operations of a business can be declared as a business car. Vehicles used for equipment (for example, dump trucks) and used for hire like a taxi cab do not qualify. You may use a personal car or a leased car for business, but only the costs for business-related use are considered tax deductible. You may also write off a luxury car. According to the IRS, these are four-wheeled vehicles, used mostly on public roads, and with an unloaded gross weight of no more than 6,000 pounds.
How do I compute the deductible expenses for business use of a vehicle?
Here are the two ways to determine how much you can write off for a business car. Each method has its pros and cons, with different results. It’s possible to have a larger deduction using the actual expenses method in one year, and still a higher deduction the next year using the standard mileage rate method.
You can use the standard mileage rate to compute the taxable expenses on the number of miles the car was driven during the year for business operations. For 2021, use 56 cents per mile driven for business use of cars, vans, pickups or panel trucks. This method can’t be used for five or more vehicles or a leased vehicle for which the actual expense method was used during the lease term.
Using the actual vehicle expenses, you may include the cost of: maintenance and repairs, rental or lease payments (such as garage rent), tires, gas and oil, licenses, depreciation, and insurance. Commuting expenses from home to the place of business is considered personal, unlike driving from one business location to another.
Registration fees, taxes, vehicle loan interest, tolls and parking fees are covered in both methods.
How can I claim deductions for the depreciation of a business vehicle?
This may not be obvious but the depreciation is already integrated under the standard mileage rate. You can’t claim an additional deduction for depreciation when you use this method.
Using the actual expenses method, you can include the depreciation of the vehicle only if the business owns the vehicle. According to the Modified Accelerated Cost Recovery System (MACRS) of the IRS, you can depreciate the cost of the vehicle over five years. The cost basis includes the purchase price, title and registration fees and sales tax. It depends on how you got it and when you began to use it for your business:
- for newly purchased used in the same year, the basis is its cost
- if acquired through trade-in, the basis is adjusted basis of the trade-in (includes the original cost minus depreciation taken, plus cash payment
- if converted from personal to business use, the basis is whichever is lower between what you paid for it and its fair market value at the time you convert it to business use
You can check the fair market value using a tool developed by VinAudit.com. VinAudit’s market value tool (free for personal use) and market value API (bulk business service) offer estimates on the current value of the vehicle in the market based on sales of vehicles with a similar year, make, model, and trim.
What are the tax deductions for a private versus company car for business?
As a business asset, a company car or a vehicle owned by a business allows more deductions including depreciation. Aside from actual expenses in using the vehicle, depreciation costs can be deducted at the rate in effect when the business begins to use the car. Under revised tax laws, a business can even claim significant bonuses if it uses a vehicle exclusively for business. Use of a personal car for business does not qualify the owner to claim for the cost of depreciation. The business can reimburse expenses related to the use of the privately owned vehicle and then file those reimbursements as business expenses.
How can I claim tax deductions for a car leased for business?
You can use the standard mileage rate which is pretty much straight forward computation. However, if you use this method in the first year of leasing the vehicle, you won’t be able to switch to the other method the following year.
With the actual expense method, you can deduct business-related expenses including lease payments You won’t be able to include depreciation which is applicable only for non-leased vehicles but subject to limitations under tax rules.
If you are entering into a lease agreement, you need the vehicle’s fair market to determine the full extent of your deductible vehicle expenses. This information may be available on the lease contract but you can acquire this from VinAudit’s market value tool (free for personal use) and market value API (bulk business service).
The fair market value can’t be more than $19,000 for passenger automobiles or $19,500 for trucks or vans on the lease term’s first day (values are applicable for leases that started in 2020). Otherwise, the lease-inclusion amount must be subtracted from the amount you can deduct as a lease payment. Check lease-inclusion amounts at the www.irs.gov. Look for Publication 463: Travel, Entertainment and Gift Expenses.
How do I track expenses for claiming tax deductions?
Claiming tax deductions for business expenses requires that you substantiate your expenses. Your records must include the amount, time, place or description, and business purpose of a particular deduction regardless of what method you use:
- Standard mileage rate method: total number of miles driven for the year, logs of trips for business purposes with mileage, dates of use for each day, destination and purpose of the trip
- Actual expense method: receipts, cancelled checks or bills except for expenses under $75 (actual expense), dates when expenses were incurred, business destination when certain expenses are incurred (tolls, parking, or gas), bills or invoice that describes the character of the expense