Are car sales taxes/fees (DMV) deductible (rideshare)

[nkerio]

I purchased and paid off my leased car in 2023 and paid DMV the taxes and fees. Are those tax deductible for my rideshare (Uber/Lyft) business? And if so, how does that work as far as allocation for each year? Is it a one time deduction for when those taxes are paid? I still haven't decided whether I'm going with the mileage or standard deduction method. Would that matter?

[Vanessa A]

Your actual expenses are only deductible if you take the actual expense deduction and not the standard mileage deduction, so yes, that does matter.

If you use the actual expense method all of your expenses are deductible that are related to the business use portion of your vehicle. Your expenses would need to be prorated based on business versus personal use.  If you drive 10,000 and only 5,000 of those miles are for business then only half of your expenses would be deductible as business expenses.  

The purchase price and fees would be part of your cost of the car.  If you choose to take the actual expense deduction, you may be able to take a Section 179 Depreciation deduction for the car you bought which would allow you to write off all of the car (business portion use) in the year you bought it.  However, if you got rid of it before the 5 years of its expected useful life, you would end up having to add some of that back to your income in the year you got rid of it.  You do not have to take section 179, it is simply an option. 

Deducting Auto Expenses

[nkerio]

Gotcha. So let's assume I'm doing the actual expense deduction. If let's say I paid $1,000 in taxes and fees to the DMV as a result of purchasing the car and I use it 90% for business, $900 can be deducted? So it's a one time deduction that can be used for that year only? Thanks for your help.

[KrisD15]

Not quite.

In TurboTax, you will enter the full amounts of the actual expenses. 

Next, you will enter the total mileage driven and the business mileage. This gives TurboTax the percentage it will use for the expenses. 

So, if you use actual expenses and paid $100 for an oil change, 10,000 total miles, 9,000 business miles, TurboTax will list $90 for an expense. 

ADDITIONALLY, you will need to enter a value for the vehicle. The 1,000 in taxes and fees is added to that value. So, if you purchased the vehicle (bought out the lease) for 20,000, the basis (your cost) is listed as 21,000.

If you bought out the lease before using it in your business, simply add it to the business section (Schedule C).

If you used the leased vehicle in your business, you must select that it was converted to personal use to get it off the books. 

You will enter this same vehicle as if it was just purchased and new to the business the year you bought-out the lease. 

Any depreciation taken for business use when it was leased will lower your basis for the "new" vehicle. 

Depreciation is taken as depreciation when using actual expenses and as "depreciation equivalent" when using Standard Mileage Rate. If you used actual expenses, the depreciation is listed on the deprecation report or Form 4562. 

You'll need to add the amounts used in previous years to the 2023 depreciation. Subtract this amount from the "new vehicle". So again, if you bought-out the lease for 20,000, paid 1,000 taxes and fees and took 2,000 depreciation, your basis is 19,000.

If you used Standard Mileage in previous years, add up the depreciation equivalent (page 35) and subtract that from the value to get to your basis. The depreciation equivalent is built into the Standard Rate, .28 per mile for 2023.

You need to keep track of the depreciation year after year when you use it as a business vehicle as that will be needed when you sell it.