As expensive as modern cars get these days, it is still a necessity for your daily lifestyle. It is also one of the biggest financial expenditures in your life. But, since most buyers use it for personal as well as business purposes, there are certain ways you can save a lot of cash by following a set of rules by the IRS.
The rules apply to both new and pre-owned cars. First, you have to decide what type of vehicle you’re going to get. Heavy vehicles with more utility are eligible for better bonuses than regular models.
There are several factors to consider before purchasing, like affordability, the type of company you own, different bonuses, and whether or not you should invest in a heavy vehicle. Car buying is very simple these days thanks to several websites like CarIndigo where you can check for accurate pricing, reviews and find a good deal.
Once you’re all set for your next purchase and choose the vehicle you want, follow these rules to get tax advantages and unburden your wallet.
Of course, you can’t write off an entire car purchase, but you can deduct a lot of the cost and expenses from your gross income to lower your tax.
Tax benefits/Section 179
These tax benefits are available if you purchase a company car to use for your business as mileage and plenty of other expenses can be write-offs. Of course, you also have an option of leasing a car instead of buying it outright to avoid losing some money through depreciation.
Back in the 2019 tax year, almost 58 cents were claimed for every business mile driven by a company car. However, it must be noted that only business miles qualify for tax write-offs. So keep a calculator handy and crunch those numbers whenever you travel for business.
The laws also state that if the car is used exclusively by the business, there are substantial bonuses in-store, most notably the depreciation bonus which can save you a lot of money in the long run.
In the United States Internal Revenue Code, section 179 allows the taxpayers to write-off a lot of costs on certain types of properties on their income taxes as an expense including vehicles.
To qualify for the write-offs, the vehicle must be bought used or new and must be financed and used by the business before December 31. More than half the usage (50% +) should be for business purposes. Anything above the 50% usage can also be deducted if used for business purposes.
Depreciation bonuses
Depreciation allowances were first revealed in 2018 and are eligible for vehicles that are used more than 50% for business purposes.
For the first year of ownership, the maximum allowance is set at $10,000, which can be increased up to $18,000 by claiming the aforementioned depreciation bonus.
For the second year, the allowance is limited to $16,000, which goes down further to $9,600 by the third year, $5,760 for the fourth year, and so on until the vehicle is depreciated completely. All these figures are applicable if the vehicle is solely used for business purposes, and will be cut back if it’s also used personally.
The allowance deducts up to $1,000,000 for qualified items. If the spending cap is reached, Section 179 also allows owners to set the dollar amount of new business assets and bonus depreciation to deduct a certain percentage of the cost.
Heavy vehicles
Heavy vehicles like SUVs, pickups, and vans which provide a lot more utility, even if bought used, are eligible for 100% first-year bonus depreciation for vehicles that are used more than 50% for the business.
To qualify for the heavy vehicle bonuses, the SUV, pickup, or a Van, you buy should have a manufacturer’s gross vehicle weight rating of more than 6,000 pounds. Some examples include big SUVs like the Chevrolet Tahoe, Ford Explorer, or pickup trucks like the RAM 2500, Ford F-250, and more.
You can always check the gross vehicle weight rating at the manufacturer’s website before zeroing in on a vehicle.
For example, if you bought a large SUV with over 6,000 GVWR for $50,000 and used it solely for business (100%) back in 2018, the entire amount can be deducted because of the 100% first-year bonus depreciation write-off. If you only use the car for 60% business, then the bonus will be calculated as 60% of $50,000 which equates to $30,000. It is also applicable for used vehicles that are new to the business.
Financing
If you finance a new vehicle, then the entire monthly expenses cannot be deducted from your taxes. However, depending on how much the vehicle is used for business purposes, the same percentage can be deducted from the lease payment. For example, if your car usage for business purposes stands at 70%, then 70% of the lease payment can be deducted.
Methods for tax deductions
There are generally two IRS-approved methods for deducting expenses and only one can be selected depending on your usage and business:
- Standard Mileage Rate Method: The standard mileage rate is determined by the IRS by tracking the number of miles the vehicle is driven. Select this method if the vehicle is constantly on the move for the business and covers a significant distance daily. In 2019 the standard mileage rate was 58 cents per mile, which means for every mile traveled for business, you can write off 58 cents from it. This can add up to a lot of money if the vehicle is used extensively.
- Actual Operating Cost Method: The actual operating cost method covers expenses like gas, miles, insurance, repairs, and maintenance together to calculate write-offs. This method is ideal for businesses that don’t involve a lot of driving and can work out cheaper than the standard driving rate.
By keeping all these steps and methods in mind, you can save a lot of money through tax write-offs on a vehicle used for business. Make sure you buy the right vehicle for the job and if possible, buy heavy vehicles that qualify for the 100% first-year depreciation bonus to save a ton of cash.
Also, select the right method for tax deductions depending on the type of usage you’re planning to do to maximize savings.