The tax implications of being able to write off a company car as a deduction can be huge, depending on the type of business you own. Learning how and when you can do so can impact the value of using your car in an official business capacity and affect your deduction.
So, when is it worth to write off your car? Let’s talk about when such a write-off is possible and what aspects of the car’s operation count as a business expense.
What cars can be deducted?
First, you need to decide whether deducing your car is worth it for you and your company. Therefore, you need to know what kinds of cars can be written off in your taxes in the first place.
Cars, trucks, and SUVs used for activities related to the running of your business are viable deductions. Transport vehicles, such as taxis, and vehicles classifiable as “equipment,” such as tractors or dump trucks, do not qualify.
You also need to become versed in how the IRS calculates depreciation. Instead of writing off the entire cost of the car in one year, you should calculate its rate of depreciation. This means calculating the general wear of the vehicle on a yearly basis.
Standard Mileage or Actual Expenses?
Standard mileage and actual expenses are two methods used by IRS use to analyze the cost of operating the vehicle used for your business. Knowing the differences between the methods will help you calculate which will give you the best return.
The most beneficial method can change from year to year based on your activities and expenses. Therefore, calculating it using both methods is a good yearly habit that will help you discover which is the right method for your needs.
Standard Mileage Method
This is the simpler method by far. The standard mileage method only requires you to keep track of how many miles you drove the business vehicle in the last year. Remember that these are only the miles you drove for business activities – you can’t write off personal use of the same vehicle in your taxes.
However, you don’t need to keep track of your specific expenditures and receipts since you won’t be able to factor them into your business expenses. This means that if your car broke down or needed significant repairs during the year in question, you may want to use the alternative method.
Actual Expenses Method
This method requires that you keep track of every expense related to the business vehicle over the last year. This includes not only maintenance, repairs, and tires, but also registration fees, insurance, lease payments, and even the gas you used to drive it.
Though the calculations are more complicated, the actual expenses method is ideal for writing off significant expenses such as transmission replacement. Moreover, this method is better suited for writing off a vehicle that is subjected to more than usual wear and tear.
Whichever method you use in your calculation, writing off your company car can be a tax advantage to your business that offers great returns. Just be sure to calculate each method separately every year, so that you know which will offer you the biggest deduction.