During tax season, you are considering how to best position yourself when it comes to the amount you will pay. The best way to save money is by receiving the full benefit from any expenditures and investments, and you may be surprised about the tax benefits you can reap from owning a vehicle. Business owners and self-employed workers gain the most in tax savings, but you can also claim vehicle deductions for charity, tag registrations, medical expenses, owning an electric or hybrid vehicle, and many other qualified expenses. When you purchase a vehicle, you may save a considerable amount of money on taxes.
Business Use of a Vehicle
If you are a small business owner or self-employed, you can deduct the business use of your vehicle for business-related expenses. This expense deduction is directly related to your business income. It not only reduces your overall tax burden, but it also reduces the self-employment tax you pay if you work for yourself.
Business vehicles that qualify for this deduction are SUVs, cars, and pickup trucks that are used for business-related activities. Vehicles that do not qualify are vehicles used as equipment or for hire. You can also claim tax deductions for the purchase of a vehicle for your business and to offset the depreciation of your vehicle as pertaining to business use.
The first order of business is to decide whether you should use the mileage deduction or deduct your actual expenses. Generally, if you do not incur many expenses overall for your vehicle, then taking the mileage deduction is better. If you spend a high amount on operating expenses like tires and repairs, then using the actual expense method is probably best. You may need to do the math each way in order to compare and choose the better deduction.
Taking a mileage deduction means that you will declare the number of miles driven in the course of your work. To use the mileage deduction, you have to choose this method in the first year the vehicle is placed into service. You can use either the standard mileage rate or the actual expenses in subsequent years. For tax year 2019, the mileage rate is 58 cents per mile.
To use the mileage deduction method, you will need to know both the total number of miles driven during the year and the total number of miles driven just for your business. To track your total miles, simply record your odometer readings on the first day you begin using the vehicle for business and for the last day of that year. You will have to note the actual miles driven for business.
Some examples of business-related travel are trips to meet with customers and clients, trips to the bank or store to take care of business concerns, meeting with your financial advisors on business matters, and any trips for similar tasks. Travel that is not considered business-related are trips to your workplace and back and any personal travel. If your trip is split between multiple errands that are a mix of work-related and personal trips, use only the miles that you drove for the business portion.
If you use the mileage deduction method, you can also claim auto loan interest, registration fees, parking, and tolls, but you cannot use other types of business-related expenses. Instead, you would use the actual expense method to claim these other types of business expenses.
Actual Vehicle Expenses
If you are using the actual expenses method, you can still deduct expenses like registration fees, auto loan interest, tolls, and parking fees. You can also claim other business-related expenses like depreciation, fuel, oil, maintenance and repairs, licenses, tires, insurance, rental or lease payments, and storage fees for your vehicle. Your percentage of business use as based on miles is the determining factor for the deductible portion that you can claim.
When you purchase a new or pre-owned vehicle primarily for your business, you can get a tax benefit with a Section 179 deduction. This is a special deduction that you can use to expense a large part of the total cost of the vehicle for the first year of service. This type of deduction works similarly to using depreciation, which spreads the expense of the purchase and your tax deductions over the life of the vehicle. The difference is that with a Section 179, you are speeding up the depreciation by taking a higher portion of the expense of the purchase in the first year.
To qualify for the Section 179 deduction, the vehicle must be used more than 50 percent of the time for business purposes, and the deduction is only for the actual amount of business use. Commuting to work and back is considered personal use and not business.
Depreciation is included in the mileage rates when you are using the mileage deduction method. If you are using the actual expense method, then you will calculate the depreciation as a percentage of the first-year allowed maximum amount, which for tax year 2019 is $10,100 and an additional $8,000 in bonus depreciation, for a total of $18,100. This applies to both new and pre-owned vehicles.
The percentage of this amount is the percentage of business use for the vehicle. Because depreciation is accumulative, the business mileage of each year affects the adjusted basis of the vehicle. This adjusted basis will be used to determine the gain or loss when the vehicle is sold.
Employee Business Expense Deduction
If you use your car or truck for work, you are no longer able to take an employee business expense deduction as an itemized deduction on Schedule A. Even if your employer does not reimburse you for these work-related expenses, you still cannot claim them. This is a suspended action and is in effect through the tax year 2025. Certain people can still claim this deduction, as in Armed Forces reservists, fee-basis local and state government officials, and qualified performing artists.
If you have to relocate due to your job, then you may be able to deduct the expense of driving your car to the new location. The move has to be at least 50 miles farther from your current home than the regular commuting distance between your current home and current job location. Another requirement is that you must have been employed by your new employer at least 39 weeks during the 12 months prior to your move.
Besides using the cost of the goods you donate to charity, you can also deduct certain car expenses incurred while conducting charitable services. For instance, driving to perform volunteer services at a church, a hospital, or a charity would be considered as a deductible expense.
You can deduct the expense associated with using your vehicle to drive back and forth for medical care for yourself and for your dependents. The driving must be primarily for the medical care and also must be essential to receiving the medical care. This deduction is added on Schedule A of your itemized medical expenses. However, to claim any medical expenses, the total amount must be 7.5 percent of your adjusted gross income.
Car Ad Valorem Taxes
You can deduct the portion of the registration fee for your vehicle that is calculated as a tax by the state of issuance. For instance, if your tag registration cost you $125 and $20 of that was the cost of the actual tag fee, then you can deduct the remaining $105 as property tax. However, property taxes in combination with state taxes are capped at $10,000.
You can receive a federal tax credit for purchasing an electric or electric hybrid vehicle. This credit is worth up to $7,500 for most electric and hybrid cars, with lesser amounts available for certain models based on the battery size. This is a tax credit and is not a refund, meaning that the amount is used to offset any taxes owed and is not issued as a refund for the amount above that. If you are leasing the vehicle, the tax credit goes to the manufacturer offering the lease. The company may factor the credit into a lower car payment, but that is up to the manufacturer.
To qualify for this federal tax credit, the vehicle must be primarily used in the United States and built by qualified manufacturers. The vehicle must have a battery pack that is rated for at least 4 kilowatts of storage and must be able to be charged from an external power source. If the vehicle is not on the IRS list of qualified vehicles, you can get a statement from the manufacturer that these requirements are met.
This credit is set to be phased out for each manufacturer, based on the amount of electric and hybrid vehicles that are sold per manufacturer. This end date is separate for each manufacturer and is set into motion after the manufacturer sells 200,000 vehicles.
You can save on your vehicle by looking into different tax deductions you may be eligible for. There is no better time than now to take full advantage of these vehicle tax deductions.