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josevramirez
Level 1

Car Deduction

I recently bough a vehicle stickily for business. 100% of its use is for business. I bought the car in full. The question is can I deduct the actual cost of the vehicle?

1 Best answer

Accepted Solutions
Opus 17
Level 15

Car Deduction


@josevramirez wrote:

The car was not a trade-in I used my own to buy the car from a private individual with a receipt sign as well. The car is used for a self employed job. @Mike9241 


To start with, you should read chapter 4 here,

https://www.irs.gov/pub/irs-pdf/p463.pdf

 

For a passenger car used 100% for business, and that you bought with cash, you can either

a. claim the standard mileage rate***

b. claim your actual expenses (depreciation, insurance, fuel, maintenance, repairs)

 

If you use the actual expense method, you can include as an expense, depreciation (which is basically wear and tear).  Depreciation is a percentage of the cost, so that's how you deduct the cost.  I believe cars depreciate over 5 years, so you would deduct 1/5 the cost per year as a business expense (this is the basic concept, the actual formula is more complicated but Turbotax will calculate it for you). 

 

You may be eligible for "section 179" depreciation which deducts the whole cost the first year you place the vehicle in service.  Turbotax will advise you if this is an option.  Whether you should choose it or not depends on several factors, keep reading.

 

Whenever you sell or trade-in the vehicle, you have to pay back any depreciation deduction you previously took on your tax return.  Suppose you buy a car for $30,000 and you take the section 179 deduction to fully depreciate it.  You sell it after 4 years for $10,000.  Since the "book value" or "depreciated value" or "adjusted cost basis" is zero thanks to section 179, you have $10,000 of income (sales price minus cost = taxable income, and your adjusted cost is zero.).  If you took normal depreciation, your adjusted cost at 4 years might be $6,000, so you would only have $4,000 of taxable income at that point.

 

You might want to use section 179 if you have a large income and want to take a large deduction.  However, if you have a small income, you might want to use regular depreciation so your business doesn't show a loss. (This might be important when applying for a mortgage, for example.  The lender might not appreciate that your business lost money last year because it bought an expensive car and fully depreciated it all at once.)

 

If you are the sort of person who trades in cars often, you probably want to take normal depreciation instead of section 179.

 

Now, let's go back to the standard mileage rate.  For many cars, the standard rate will result in a larger deduction than tracking your actual expenses for depreciation, fuel and repairs.  This is especially true for modest cars and used cars, and for high annual miles driven.  (It may not be true for new or very expensive cars with high insurance costs.).  The standard mileage rate include an allowance for depreciation so you can't take depreciation separately, and if you want to use the standard mileage method, you have to use it the first year you place the car in service for the business.  The standard mileage method also requires a lot less record keeping and paperwork.  

 

Where you make money with the standard mileage method is if you are the sort of person to drive your vehicles into the ground.  Consider the following example:

 

a. You purchase a slightly used car for $20,000 and drive it 15,000 miles per year for business over 10 years.  (Most cars should be in good shape up to 150,000 miles.). Using the actual expense method, you would have claimed $20,000 depreciation over the first 5 years and then nothing for the second 5 years (you still claim gas, insurance and repairs of course).  You sell the car for $1000, which is $1000 of taxable business income due to depreciation recapture.

 

b. Or, you use the standard mileage rate.  Out of the full 57 cents per mile, about 25 cents per mile is the depreciation part, so at the end of 10 years you have taken $37,500 of depreciation.  You have deducted almost twice what the car actually cost!  You sell it for $1000 which is $1000 of taxable business income (since your adjusted cost is zero).  You never have to account for the fact that you deducted far more for depreciation than the car actually cost. 

 

So what you may want to do depends on what kind of car driver you are, how often you intend to replace the vehicle, and how good you are at detailed record keeping.  

*Answers are correct to the best of my ability at the time of posting but do not constitute legal or tax advice.*

View solution in original post

5 Replies
Mike9241
Level 15

Car Deduction

was there a trade-in and if so, was the trade-in personal or 100% business?

 

 

TT has a special asset entry worksheet for vehicles. if you are an employee (get a w-2), sorry to say. you get no deductions for the use of the vehicle if it's used in that business.

for the self-employed, Corporations, or partnerships, there are rules for how much can be deducted in the first year as depreciation. There are 6 categories for vehicles,

 

josevramirez
Level 1

Car Deduction

The car was not a trade-in I used my own to buy the car from a private individual with a receipt sign as well. The car is used for a self employed job. @Mike9241 

AmeliesUncle
Level 13

Car Deduction

Maybe.  But before we get to that, do you WANT to deduct the full cost?  In many cases, using the Standard Mileage Rate is a better long-term deduction.  And if you don't use the Standard Mileage Rate in the first year, you can never use it for that vehicle.

 

If you decide to use Actual Expenses (rather than the Standard Mileage Rate), the answer to your question depends on (a) the total cost of the vehicle, (b) the weight of the vehicle, and in some cases (c) the type of vehicle/what it is used for.

Opus 17
Level 15

Car Deduction


@AmeliesUncle wrote:

Maybe.  But before we get to that, do you WANT to deduct the full cost?  In many cases, using the Standard Mileage Rate is a better long-term deduction.  And if you don't use the Standard Mileage Rate in the first year, you can never use it for that vehicle.

 


Depends on the cost of the vehicle.  Standard mileage rate works best if the vehicle is modest and you plan to own it a long time.

*Answers are correct to the best of my ability at the time of posting but do not constitute legal or tax advice.*
Opus 17
Level 15

Car Deduction


@josevramirez wrote:

The car was not a trade-in I used my own to buy the car from a private individual with a receipt sign as well. The car is used for a self employed job. @Mike9241 


To start with, you should read chapter 4 here,

https://www.irs.gov/pub/irs-pdf/p463.pdf

 

For a passenger car used 100% for business, and that you bought with cash, you can either

a. claim the standard mileage rate***

b. claim your actual expenses (depreciation, insurance, fuel, maintenance, repairs)

 

If you use the actual expense method, you can include as an expense, depreciation (which is basically wear and tear).  Depreciation is a percentage of the cost, so that's how you deduct the cost.  I believe cars depreciate over 5 years, so you would deduct 1/5 the cost per year as a business expense (this is the basic concept, the actual formula is more complicated but Turbotax will calculate it for you). 

 

You may be eligible for "section 179" depreciation which deducts the whole cost the first year you place the vehicle in service.  Turbotax will advise you if this is an option.  Whether you should choose it or not depends on several factors, keep reading.

 

Whenever you sell or trade-in the vehicle, you have to pay back any depreciation deduction you previously took on your tax return.  Suppose you buy a car for $30,000 and you take the section 179 deduction to fully depreciate it.  You sell it after 4 years for $10,000.  Since the "book value" or "depreciated value" or "adjusted cost basis" is zero thanks to section 179, you have $10,000 of income (sales price minus cost = taxable income, and your adjusted cost is zero.).  If you took normal depreciation, your adjusted cost at 4 years might be $6,000, so you would only have $4,000 of taxable income at that point.

 

You might want to use section 179 if you have a large income and want to take a large deduction.  However, if you have a small income, you might want to use regular depreciation so your business doesn't show a loss. (This might be important when applying for a mortgage, for example.  The lender might not appreciate that your business lost money last year because it bought an expensive car and fully depreciated it all at once.)

 

If you are the sort of person who trades in cars often, you probably want to take normal depreciation instead of section 179.

 

Now, let's go back to the standard mileage rate.  For many cars, the standard rate will result in a larger deduction than tracking your actual expenses for depreciation, fuel and repairs.  This is especially true for modest cars and used cars, and for high annual miles driven.  (It may not be true for new or very expensive cars with high insurance costs.).  The standard mileage rate include an allowance for depreciation so you can't take depreciation separately, and if you want to use the standard mileage method, you have to use it the first year you place the car in service for the business.  The standard mileage method also requires a lot less record keeping and paperwork.  

 

Where you make money with the standard mileage method is if you are the sort of person to drive your vehicles into the ground.  Consider the following example:

 

a. You purchase a slightly used car for $20,000 and drive it 15,000 miles per year for business over 10 years.  (Most cars should be in good shape up to 150,000 miles.). Using the actual expense method, you would have claimed $20,000 depreciation over the first 5 years and then nothing for the second 5 years (you still claim gas, insurance and repairs of course).  You sell the car for $1000, which is $1000 of taxable business income due to depreciation recapture.

 

b. Or, you use the standard mileage rate.  Out of the full 57 cents per mile, about 25 cents per mile is the depreciation part, so at the end of 10 years you have taken $37,500 of depreciation.  You have deducted almost twice what the car actually cost!  You sell it for $1000 which is $1000 of taxable business income (since your adjusted cost is zero).  You never have to account for the fact that you deducted far more for depreciation than the car actually cost. 

 

So what you may want to do depends on what kind of car driver you are, how often you intend to replace the vehicle, and how good you are at detailed record keeping.  

*Answers are correct to the best of my ability at the time of posting but do not constitute legal or tax advice.*
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