So, you make some money. You got some expenses.
And you’re telling yourself that one day, “I’m going to earn my dream car.”
But hold on, what if we told you, you can get it for free. And what if we told you the business tax code was actually set up for you to do so?
And companies around the world take advantage of this by providing cars for their executives and employees.
Crazy right? In this post, let us show you how to write off your dream car, so keep reading.
Today, we’re talking about vehicle deductions that we’ve used for ourselves and many other clients to help reduce their taxable income.
Now unless you’re an accountant reading this then we know you didn’t go to school to learn taxes and you probably don’t spend your weekends binge reading the tax code.
So we’re not going to use a bunch of tax jargon you will read on other blogs.
Instead, we are going to do our best to make this a very simple guide so that you can follow and implement this yourself on your next tax return.
Let’s go ahead and dive right in.
So there are a lot of different ways you can purchase a car, but there are really only two different ways on how to write off a car.
Ways on How to Write Off Your Dream Car
You can choose to use the standard mileage rate or you can choose to use actual expenses. These are two simple concepts, so let us explain.
1. Standard Mileage Rate
Now this one is probably the most common because people can use the standard mileage rate with a car they already own.
So with this method, you need to track how many miles you are driving for business.
And there are so many ways you can track this, there are apps like MileIQ or even using QuickBooks to make tracking mileage easier.
The purpose of tracking your mileage is because you, as the taxpayer, get a vehicle deduction on every mile you drive.
And that deduction in 2020 is 57.5 cents per mile. So let’s do some math.
If you drove 30,000 business miles in 2020 and had a standard mileage rate of 57.5 cents per mile. Your tax deduction would be about $17,250.
Now keep reading because at the end we’re going to do another example comparing the standard mileage rate to the actual expenses rate.
And by the way, for the tax year 2021, the IRS is projecting the standard mileage rate will be 56 cents per mille, so a slight reduction but still something to take advantage of.
2. Actual Expense Vehicle Tax Deduction
Now let’s look at the second way on how to write off a car with is with actual expenses.
So actually expenses are just the actual expenses you have on your car.
It’s the expenses you have to maintain your vehicle. This would include:
- depreciation cost
- lease payments
- registration fees
They are ALL deductible when you’re using a car for business.
Now to be clear, if you’re using a car for business and personal then you need to separate and split those expenses as best as possible, but we’ll give you some ideas for that later.
The actual expense method is usually for people who are open to leasing their car.
That’s because you can’t write off your car loan payments since that isn’t an expense. That is a liability.
Now that can be getting kind of technical and you don’t really need to know the difference between expense and liability.
All you really need to know is that with the actual expense method, you can write off a lease, but not a car loan payment.
So once you understand the two different ways you can write off a car. The next step is deciding which method to choose right.
How to Write Off a Car: Which Method Should You Use?
So, you want to think about what kind of business you have.
1. For Those Who People Who Drive a Lot
For example, how much are you driving and where are you driving to because that will sway you in which method you should choose, right? Like our Uber, taxi, Lyft drivers, drive A LOT of miles.
That’s why it makes more sense for them to own a car and use standard mileage.
2. For Those Who People Who Don’t Have Long Commutes or Drive a Lot
On the other hand, if you are not driving much or don’t have long commutes then that may not work for you.
Like a lot of real estate agents, product owners, and content creators, they want to purchase a vehicle for business purposes and just write off all the expenses.
So let’s bring this together and talk about how to do this.
Now we know the two different ways to write off your dream car.
And you probably already have an idea of how much you drive and whether you need to take standard mileage or actual expenses.
So let’s get into what you need to do.
How to Use Standard Mileage Rate Deduction
For the standard mileage rate, it’s pretty easy. Tell the IRS what kind of car you have, track your mileage for business, and get your tax deduction.
The biggest thing you need to be aware of is that the IRS will ask “if you have evidence of your mileage”.
This is why it’s important that you track everything just in case you get audited. Because you definitely don’t want to go to jail for tax fraud.
How to Use Actual Expense Deduction
Now let’s talk about actual expenses.
The first question you’re going to get is, “what percentage of your vehicle is used for business?” And you want to get that percentage as high as possible.
The higher the business use, the more tax deductions you get and the closer you get to a vehicle essentially being tax-free.
So let’s say, for example, we lease a car for $1,000/mo. And 75% of the car was used for business and 25% was used for personal.
We can then write off $750/mo of the lease payments which is $1,000 x 75%. And then we also go write off 75% of the insurance, the registration, the gas, etc.
It is so important for us to track all the expenses so that we can write it off. And if your income is high, you might be getting all this stuff paid for, basically for free.
So track all your expenses, use QuickBooks or you can even use a spreadsheet. Just don’t be one of those people who have 100 receipts that are unorganized.
Accelerated Vehicle Depreciation
If you’re making a lot of money and you know you’re going to have a huge tax bill at the end of the year, like 6 plus figures in tax liability.
Then instead of leasing your car, which would give you a healthy amount of expenses year over year, consistently, you can buy a car and if that weighs over 6,000 pounds, you can use code section 179.
This allows you to expense a business vehicle 100% in the first year with accelerated depreciation.
So you buy a car, that car costs $150,000, let’s say it’s the Tesla Model X or maybe its a G wagon, whatever you want.
The key is the vehicle weighs more than 6,000 pounds AND you use that car specifically for business.
Under section 179, you’re allowed to take 100% expense of accelerated depreciation in the first year.
Sounds good, right? So if you had a $150,000 tax liability, the money you would have to pay the government anyway, this would allow you to get a $150,000 tax write-off.
And this can be a tax savings of 30-40%!
Now, this is the power of leveraging the tax code and why accountants and CPAs get paid so much money.
Because the right accountant, even though may charge you $5000 for tax planning, may help save you $60,000 in a tax year.
Car Depreciation Value
Now one important thing to know about taking depreciation on a car that you own…
…is that if you sell it, then there is a gain above your depreciation amount then you will have to repay depreciation in what is called depreciation recapture.
So, for example, if use accelerated depreciation and get a $150,000 tax write-off in year 1.
And then you decide to sell it for $130,000 in year 2. Then you will repay $120,000 in depreciation and report it as income.
So if you’re going to buy a car, you need to think long-term, like are you going to have this car for the next 5+ years. Because if not, then consider leasing right.
Bonus Tips on How to Write Off a Car
Since you made it this far, here are two bonus tips for using a car as a business expense.
1. Put your business on the car.
Let us explain, so if you’ve ever been on the road and you’ve seen someone with their face on their car.
Or business information like their website, or phone number, or email address…
Then more than likely (if they’re smart) then they are using their car as a business expense. Because everywhere they drive, they are essentially promoting their business, right?
We’ve even seen some cars with an electronic billboard on top of them, so they are basically promoting their business.
So think about how you can literally, put your business on your dream car.
Now, we hear someone saying, “But hey, I don’t wanna do that? That’s going to mess the car completely up.”
And we say, get over it, do it, because the benefits tremendously outweigh the cons.
And you can still do it in a way where your car looks good. Get creative. But if you really don’t want to, then here’s the second tip.
2. Use your car for business content creation.
Of course, digital marketing and advertising are really important for any business in 2021. So think about how you can incorporate your car while promoting your business.
Maybe you take pictures with your car and put them in ads or social media posts. We see people do this all the time when they are trying to show off their lifestyle.
Or maybe you can literally make videos outside or inside of your car talking about your business.
Again be creative and figure out how you can incorporate your dream car as a part of your business.
Now if this wasn’t clear, you need to own a business or be self-employed to use your car as a tax deduction.
If you want to play the tax game, you need to get into business. The US economy and the greatest economies in the world are built on who can provide the most value.
So as a consumer, when you’re buying stuff and looking good, that’s nice, but you’re not really providing value. So there are no tax write-offs in that.
But when you have a business and are actually giving value through products or services then you are providing value.
Helping the economy grow and for that the government and tax system rewards you.
Now, this is only one deduction and just scratching the surface of all the tax write-offs you have.
So the best option for you is to hire a reliable accountant to help you with all of these tax write-offs and deductions.
Do it today and get in touch with one of our tax consultants to help you save more on your taxes.