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Updated for Tax Year 2022 • October 18, 2022 11:34 AM OVERVIEW If you use vehicles in your small business, how and when you deduct for the business use of those vehicles can have significant tax implications. It pays to learn the nuances of mileage deductions, buying versus leasing and depreciation of vehicles. Special rules for business vehicles can deliver healthy tax savings. Key Takeaways • The cost of operating cars, SUVs, and pickup trucks that are used for business activities typically are deductible. Costs of
vehicles used as equipment (such as dump trucks), vehicles used for hire (such as taxi cabs), and luxury autos are not deductible. • You can calculate expenses using the IRS’s standard mileage rate (58.5 cents per mile for the first half of 2022 and 62.5 cents per mile for the last half of 2022) or by adding up the actual expenses (gas, oil, tires, repairs, etc.) for the business use of the vehicle. • A vehicle used for business may be owned by the
corporation or by an employee. The method of claiming the deduction will differ depending on the ownership of the vehicle. • If your business leases a vehicle, you can use either the standard mileage or actual expenses method to calculate the deduction. However, if you use the standard mileage rate, you cannot switch to the actual expense method in a later year. Some important questionsThe deduction for using vehicles in your business can sometimes be significant, so it's important to make the following decisions:
Here's a general overviewBusiness vehicles are cars, SUVs and pickup trucks that are used for business activities. What does not qualify:
Luxury Autos Congress decided years ago that the taxpayers should not subsidize extravagant vehicles used by business. To prevent that, the law squeezes otherwise allowable depreciation deductions for “luxury cars.” But don’t think Rolls Royce or Ferrari. Congress has a much less extravagant view of luxury. For new and pre-owned vehicles put into use in 2022 (assuming the vehicle was used 100% for business):
Keep good recordsThe IRS is very fussy about writing off the cost of vehicles, so if you plan to take a vehicle deduction, keep a detailed log of your business miles and other expenses if you want to write them off, too. Standard mileage rate versus actual expensesWhether to use the standard mileage rate or actual costs is a numbers game.
Standard mileage rateThe IRS allows employees and self-employed individuals to use a standard mileage rate, which for the first half of 2022 is 58.5 cents per mile and increases to 62.5 cents per mile for the second half of 2022. To determine the number of miles driven for business you need two numbers for each business vehicle:
Tracking your total mileage for the year is simple. Write down the odometer reading on the day that you start using a vehicle for business and on the day the year ends. Miles that count as part of your business mileage deduction include the number of miles actually driven for business. For example, miles driven:
Some travel is not considered business-related:
You can also deduct interest on an auto loan, registration and property tax fees, and parking and tolls in addition to the standard mileage rate deduction, as long as you can prove that they are business expenses. Actual vehicle expensesIf you decide to use the actual expenses method, additional auto-related expenses are deductible, such as,
*Also deductible if you choose the standard mileage method. The percentage of use (based on miles) that the vehicle is used for business determines the deductible portion of these expenses. Here's how the math works: Let's say your gas, oil and repairs came to $3,000 for the year. Fees and taxes were $500. Loan interest and insurance were $1,500. If it's an old car, there is no depreciation write-off. Your total "actual" expenses were $5,000.
Your total mileage was 18,000 and documented business miles were 16,200 (spread evenly throughout the year). The business-use percentage is 90%.
If you use the actual expenses method, you could deduct $4,500 (90% of $5,000).
If you use the standard mileage rate, your 2022 deduction would be $9,801.
In this case, the standard mileage method gives you the bigger tax benefit. The business-use percentage usually varies from year to year. Operating expenses are annual expenses and do not affect subsequent years. TurboTax Tip: Even if you use the standard mileage rate deduction, you can still deduct interest on an auto loan, registration and property tax fees, and parking and tolls, as long as you can prove that they are business expenses. DepreciationThis is the amount you can deduct over time for general wear and tear of the vehicle. The standard mileage rate includes an amount for depreciation and reduces the adjusted basis of the vehicle when you decide to sell or otherwise dispose of it. In the example above, it works out this way:
If you use the "actual" expenses method and the vehicle was acquired new in 2022, the maximum first-year depreciation deduction, including bonus depreciation, for an auto in 2022 is $19,200. In the example above, your depreciation on an auto would be limited to the business-use percentage of 90% times the maximum 2022 first-year maximum of $19,200, or $17,280. Since depreciation accumulates, each year's business mileage affects the adjusted basis of the vehicle. The adjusted basis will, in turn, be used to determine the gain or loss when the vehicle is sold, so keeping good records is essential. Note: In order to use the standard mileage method, you must choose this method in the first year the vehicle is placed in service. In later years you can choose to use the standard mileage rate or actual expenses. The ownership dilemmaSelf-employed owner (sole proprietor) The owner can choose to use either the actual expense method or the standard mileage rate method subject to the rules outlined above. If an employee uses a personal vehicle for business,
Note: If you are a single-member LLC and file a Schedule C with your personal tax return (Form 1040), you are considered a self-employed owner for tax purposes. S Corporation/C Corporation A vehicle used for business may be owned by the corporation or by an employee (even a shareholder employee). The method of claiming the deduction will differ depending on the ownership of the vehicle. Vehicle owned by employee If the employee (or a shareholder employee) uses their personal vehicle for business on behalf of the corporation,
For tax years prior to 2018, if the employee is not reimbursed for business travel expenses, the employee,
Beginning in 2018, unreimbursed employee expenses are no longer deductible. Vehicle owned by the corporation A corporation must determine the deduction for vehicles it owns based on actual operating expenses. The corporation is also limited by the business-use percentage of the vehicle. The corporation can deduct all of the operating expenses of the vehicle without regard to the business-use percentage, if the personal-use percentage is treated as income to the employee.
Partnership/LLC The rules are the same as an S Corporation, with one exception: A partner/member who has unreimbursed auto expenses as a requirement of the partnership/LLC agreement can typically claim the deduction on Schedule E of Form 1040 rather than on Schedule A. Note: It's generally simpler for a business to allow an employee (even a shareholder, partner, or member) to use their personal vehicle and submit an expense reimbursement request. This eliminates a substantial amount of record-keeping for the employer. Buy or lease?You can use the either the standard mileage or actual expenses method for a leased vehicle. However, if you use the standard mileage rate, you cannot switch to the actual expense method in a later year.
Annual income inclusion amountWhen the value of the leased vehicle is above a certain amount, you must also subtract an "income inclusion" amount from the deductible amount of your lease. This income inclusion rule is an attempt to equalize the tax benefits from leasing and owning business vehicles.
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The above article is intended to provide generalized financial information designed to educate a broad segment of the public; it does not give personalized tax, investment, legal, or other business and professional advice. Before taking any action, you should always seek the assistance of a professional who knows your particular situation for advice on taxes, your investments, the law, or any other business and professional matters that affect you and/or your business. |