What should you consider before writing off a vehicle?
Written by Stephen Nance, Vice President of DrillDown Solution
Dentist’s ask me every year if they can write-off their car or truck. The answer is yes…maybe…with some limitations. Most questions I receive about taxes, have the answer, it depends. There are nine things to consider before you choose to write-off the cost of a business vehicle.
You have two choices. You can take depreciation and actual vehicle expenses, or you can take the standard mileage rate. Whichever option you choose, you must have records. Mileage requires a mileage log or travel calendar.
Corporations, including S-corporations, require an accountable plan with direct reimbursement. Accountable plans are a plan to reimburse your team members for business expenses that do not qualify as income.
Business expenses must be business-related to follow the IRS accountable plan regulations. Be aware, once you use actual expenses, you cannot switch in a future year to the standard mileage rate. The standard business mileage rate is 58 cents per mile for 2019 and 57.5 cents per mile for 2020.
Register in the Name of the Business
Before you can depreciate a vehicle, you must register it in the business’s name. Every is a little different. Be aware that sales tax on cars registered to companies exists in some states. Insurance rates may increase on business registered vehicles too. If you are in a high tax bracket and your vehicle is used predominately for business purposes, the tax savings often outweigh the costs.
MACRS stands for modified accelerated cost recovery system. It is the system used in the United States to calculate tax deductions for depreciable assets. Using MACR, business use vehicles generally depreciate over five years.
Depreciation of a vehicle is limited to $18,100 for the 2019 tax year, even if Section 179 is elected. Passenger vehicles are defined as four-wheeled vehicles primarily used on public roads and are 6,000 pounds or less. (IRS Publication 946)
Sport Utility Vehicle
The passenger vehicle limitation does not apply to sport utility vehicles (SUV). If you bought your SUV as a Section 179 purchase, only $25,000 is allowed. SUVs are 4-wheeled vehicles that carry passengers over public roads. SUVs weigh 6,000 to 14,000 pounds.
Vehicles With no Limitations
Neither of the above limitations apply to any vehicle to which any of the following apply(per IRS Pub. 946):
- Vehicles designed to seat more than ten passengers.
- Unmarked official vehicles used by law enforcement officers.
- Ambulances used as such and hearses used as such.
- Vehicles with a loaded gross weight of over 14,000 pounds and are designed to carry cargo.
- Bucket trucks, cement mixers, dump trucks, flatbed trucks, and refrigerated trucks.
- Combines, cranes, derricks, and forklifts.
- Delivery trucks with seating only for the driver or only for the driver plus a folding jump seat.
- Moving vans, if certain requirements are met. Contact your CPA if you might want to use this.
- Specialized utility repair trucks, if certain requirements are met. Contact your CPA if you might want to use this.
- School buses used in transporting students and employees of schools.
- Buses with a capacity of 20 or more passengers and are used as passenger buses.
- Tractors and other special purpose farm vehicles.
- Trucks or vans specially modified and used minimally for personal purposes.
- Examples of this are the installation of permanent shelving.
- Painted display advertising or company name.
In general, expenses for business vehicles operating leases are allowed a tax deduction but, certain limitations apply. The IRS has lease value inclusion tables to limit the lease deduction based on the year and make of the specified vehicle. In most cases, these are minor adjustments.
Business Versus Personal Use
In all cases, only the business use amount is deductible. Commuting to and from work or a regular/frequent business/work location is considered personal use.
Team Use of Business Vehicles
If team members use business vehicles for personal use, (including regular home parking), you must include a portion within your team’s taxable compensation. The following are the available methods to calculate the personal use amount:
- Annual lease valuation
- Vehicle cents-per mile
Example of standard mileage:
Dan, a sole proprietor, drove 15,000 miles in 2019 for business purposes, not including any regular commute miles. At 58 cents per mile, Dan is allowed a tax deduction of $8,700.
Note that if he elects to take the mileage tax deduction, he may not deduct the cost of the vehicle, fuel costs, or repairs in the same year.
Example for actual costs:
Lindsey, owner of Neighborly Dental, purchases a Mazda CX-5 for $30,310 on January 1, 2019, registers it under the name Neighborly Dental, and uses it 75% for business purposes. The Mazda CX-5 has a gross vehicle weight rating of less than 6,000 pounds. Neighborly Dental is allowed a deduction for depreciation of $13,575 (18,100 X 75%) for 2019, and the remaining 9,158 (30,310 X 75% – 13,575) will be depreciated over the next 4 years. Additionally, Neighborly Dental is allowed to deduct the business use portion of all fuel, repairs, registration fees, insurance, etc.
Note that if Neighborly Dental elects to deduct depreciation and other actual costs, it may not take the standard mileage deduction for 2019 or any future year for the same vehicle.
Yes, you can write off your vehicle, but there are specific rules to follow. Each situation is different. If you have additional questions, please contact us. We want to work proactively to help put you in the best financial position possible.
For more information go to our website at https://drilldownsolution.com