Congrats on the new to you vehicle. There are two different ways you can expense this truck. The very first year that you placed this truck in service is very important. You can take the standard mileage rate per business mile. The standard mileage rate includes depreciation of the truck, repairs and gas. It is a fixed amount set by the IRS. The standard mileage rate for 2023 is 65.5 cents per business mile.
The other way is to take actual expenses. When you take the actual expenses you get to claim depreciation of the truck, actual cost of repairs, gas, and insurance based on the business portion that you use the truck.
For example, if you drive the truck 1000 total miles in the year and 900 of those miles are for business, you will get a deduction of 90% of your actual cost.
If you choose to use the actual expenses, you must continue to claim actual expenses each year the truck is used for your business.
You can also deduct the interest paid on the truck loan on the business portion.
Hi There:
1. Can you explain the ins and outs of the vehicle purchase as a business expense? The IRS allows a vehicle deduction for all ordinary and necessary vehicle expenses as long as you are self-employed and not a W2 employee.
2. How do I take that deduction? You have the choice of the standard mileage rate which in 2023 is 65.5 cents for every business mile driven or actual expenses incurred for the business which will be claimed with Turbo Tax - Self Employment - Schedule C - Vehicle Expenses.
3. Expert tips, tricks, + insider knowledge will be very appreciated Assuming business use of at least 50% for the vehicle, many new vehicle owners elect the actual method of vehicle expenses in order to take advantage of accelerated depreciation on the vehicle, which could greatly increase the vehicle deduction.
You can claim vehicle expenses on your schedule C that you file for your business; this form contains all business income and expenses.
Basically, there are two ways to claim Vehicle expense; a) Standard Mileage or b) Actual expenses. You need to keep track of your business miles for both.
Standard Mileage – This is the easiest method. You simply keep track of total miles that you drove all year, for any purpose, and miles driven for your business.
You get to claim the IRS standard mileage rate per mile; for 2023, that is currently 65.5 cents per mile. The cost of the car, the cost to maintain, none of that comes into play with this method.
Actual Expense – Using this method, you need to keep track of all costs in total of owning your vehicle. Costs that you can include gas, oil, repairs, tires, insurance, registration fees and car washes.
You can also claim the interest on your vehicle loan, plus depreciation on the vehicle.
If you enter the cost of the car into your TurboTax software, and answer the questions, the program will compute the correct depreciation for you.
The amount of your actual expenses that you get to deduct is all of your vehicle expenses multiplied by the ratio of your business miles to your total miles driven.
Something to keep in mind; the more business miles you drive, the more that the direct mileage method will benefit you over time.
Please keep in mind that you can switch off between the two methods for different tax years ONLY IF you use the actual expense method first year you claim the vehicle on your return.
Here are some helpful links and delve a little deeper into the topic:
https://www.irs.gov/taxtopics/tc510
Please let me know if I can clarify anything further for you.
The above answers assume you are a disregarded entity (sole prop or single member LLC reporting your business on schedule C). If this is a multimember partnership or S-corporation, and you are using your personally owned vehicle for business, things get a little more complicated.
Assuming you are a sole prop or single member LLC, and the vehicle is used 100% for business, then you can use the standard mileage method or the exact expense method. If you use the standard mileage rate in the first year, then in future years you can change between standard mileage and exact expense. If you use the exact expense method the first year the vehicle is placed in service, you must always use the exact expense method.
All the rules are in chapter 4 here.
https://www.irs.gov/forms-pubs/about-publication-463
Note that your loan interest is a deductible business expense no matter which method you use to deduct the actual vehicle operating expenses.
Some thoughts on depreciation. Depreciation is an allowance for wear and tear. If you use the exact mileage method, you will depreciate the vehicle over 5 years. That means even though you spent $35,000 this year, you only deduct roughly $7000 per year as a business expense. You may qualify for section 179 depreciation, which would allow you to deduct the entire $35,000 in year 1. However, if you stop using the vehicle for business in less than 5 years, you will have to repay some or all of the depreciation you claimed.
The standard mileage rate includes an allowance for depreciation of 27 cents per mile. The trick is, if you use the standard mileage method, you can get the benefit of that depreciation allowance even after the vehicle is fully depreciated. Suppose you keep this truck for 10 years. You can fully depreciate it in year 1 under section 179, or over 5 years under normal deprecation, but for the last 5 years, you get no benefit from depreciation. However, suppose you drive this truck 20,000 miles per year and use the standard mileage method. Over 10 years you will claim $54,000 of depreciation as a business expense even though you only paid $35,000. Obviously, it depends on the mileage you expect to drive and how long you expect to use the vehicle for business. But if you drive the vehicle far enough, the standard mileage method may have advantages in the end, even though you can't depreciate as much up front.
Thank you for your expertise and the time you've taken to help me understand!
Thank you for taking the time to help me understand! I appreciate all the details so much.
In your response, you say:
Please keep in mind that you can switch off between the two methods for different tax years ONLY IF you use the actual expense method first year you claim the vehicle on your return.
But the person responded below you contradicting that statement saying that If I choose the ACTUAL EXPENSE method for year 1, then I have to claim in that way always.
Just wanted to clarify that since I am not sure which one is correct.
So sorry, I mispoke (or mistyped) in this case; you can exchange methods if you use the STANDARD MILEAGE method the first year you claim the car as a deduction.
Thanks for seeking clarification!
From the irs.gov topic no. 510. If you take the actual miles first year, you must continue with actual expenses.
Standard Mileage Rate - For the current standard mileage rate, refer to Publication 463, Travel, Entertainment, Gift, and Car Expenses or search standard mileage rates on IRS.gov. To use the standard mileage rate, you must own or lease the car and:
- You must not operate five or more cars at the same time, as in a fleet operation,
- You must not have claimed a depreciation deduction for the car using any method other than straight-line,
- You must not have claimed a Section 179 deduction on the car,
- You must not have claimed the special depreciation allowance on the car, and
- You must not have claimed actual expenses after 1997 for a car you lease.
Assume I'm buying a $50,410 car (Tesla model 3) in 2023 for 100% business use and I take bonus depreciation.
Is Option 1, Option 2, Option 3 correct for the depreciation deduction?
Option 1
2023: $20,200
2024: ($50,410 - $20,200) * .32 = $9,667.2
2025: ($50,410 - $20,200) * .1920 = $5,800.32
2026: ($50,410 - $20,200) * .1920 = $5,800.32
2027: ($50,410 - $20,200) * .0576 = $1,740.09
Option 2
2023: $20,200 + ($50,410 - $20,200) * .2 = $26,242
2024: ($50,410 - $20,200) * .32 = $9,667.2
2025: ($50,410 - $20,200) * .1920 = $5,800.32
2026: ($50,410 - $20,200) * .1920 = $5,800.32
2027: ($50,410 - $20,200) * .0576 = $1,740.09
Option 3
2023: $20,200
2024: ($50,410 - $20,200) * .32 = $9,667.2
2025: ($50,410 - $20,200 - $9,667.2) * .1920 = $3,944.2
2026: ($50,410 - $20,200 - $9,667.2 - $3,944.2) * .1920 = $3,186.9
2027: ($50,410 - $20,200 - $9,667.2 - $3,944.2 - $3,186.9) * .0576 = $772.5
And can we even apply safe harbor in 2023 (https://www.irs.gov/pub/irs-drop/rp-19-13.pdf)?
Additionally, will bonus depreciation be the best bet for maximizing deductions (assuming im not using the standard mileage) for a vehicle.
option 1 but you must reduce the depreciable basis by any EV credit allowed or allowable.
2 followup:
1. So assuming $7,500 EV credit, does that mean I take my initial price of $50,400, subtract $7,500 and then do the same math in option 1 with $42,900 as the start?
2. What tax code says this? An accountant told me that the $7,500 EV credit just reduces my owed taxes and doesn’t influence my vehicle’s depreciation?
ChatGPT says:
"the federal tax credit for EVs does not directly reduce the basis for depreciation."
@fanfare wrote:
ChatGPT says:
"the federal tax credit for EVs does not directly reduce the basis for depreciation."
ChatGPT also prepared a legal brief complete with made up citations, causing the lawyer who submitted the brief to be sanctioned by the court. I would rather see a direct citation to the code or regulation.
Note that depreciation is based on the fair market value when the vehicle is placed in service, or the adjusted cost basis, whichever is less. Tax credits and discounts always reduce the cost basis when we are talking about any other credit (such as energy efficient improvements), and there is nothing in the code to suggest the EV credit is different.
There is also a new credit for clean commercial vehicles which specifically says that the basis for depreciation is reduced by the credit amount.
https://www.irs.gov/credits-deductions/commercial-clean-vehicle-credit
If you purchase the vehicle directly for the business, you must reduce your basis by the amount of the credit. Therefore, it follows that if you purchase a vehicle personally and then place it into service with your business, you must also reduce your basis. Unless you can find affirmative statement to the contrary.
Publication 946:
"If you depreciate your property under MACRS, you may also have to reduce your basis by certain deductions and credits with respect to the property. For more information, see What Is the Basis for Depreciation? in chapter 4."
I would not trust ChatGPT.
So does that mean I subtract the ev credit amount from the initial cost of the car before calculating depreciation?
well i just iting the code
30D (a)
(a)Allowance of credit
There shall be allowed as a credit against the tax imposed by this chapter for the taxable year an amount equal to the sum of the credit amounts determined under subsection (b) with respect to each new clean vehicle placed in service by the taxpayer during the taxable year.
and then there's 30D (f)
(f)Special rules
(1)Basis reduction
For purposes of this subtitle, the basis of any property for which a credit is allowable under subsection (a) shall be reduced by the amount of such credit so allowed (determined without regard to subsection (c)).
(2)No double benefit
The amount of any deduction or other credit allowable under this chapter for a vehicle for which a credit is allowable under subsection (a) shall be reduced by the amount of credit allowed under such subsection for such vehicle (determined without regard to subsection (c))
maybe i'm missing someyhing/.
@Mike9241 wrote:
maybe i'm missing someyhing/.
No, it's right there. The basis is reduced by the credit.
@Opus 17 wrote:
No, it's right there. The basis is reduced by the credit.
This is also right in the TurboTax Guidance.
@as744 wrote:
So does that mean I subtract the ev credit amount from the initial cost of the car before calculating depreciation?
Yes, your basis for depreciation is the net price after the credit.
Hi this is in reply to the the above question regarding the standard deduction versus actual expenses method. The solution says, "You can only use actual expenses if you used this method THE VERY FIRST YEAR you placed the car into service."
OK, I have a WHAT IF:
So I placed my car into service in 2019 for my sole proprietorship. I'm sure I've taken the standard deduction....not sure how to double check that tho. But at the time that I got the car, it was A LEASE. So this year, we bought out the lease only because car prices had jumped 100% a long with everything else. Never the less, we paid a hefty tax and license fee, and our loan interest is higher because there was no special APR rate on lease buy out. In fact, the fees were so high that the purchase was back up nearly to the original lease amount, but this time financed as a purchase. I want to be able to claim all of that since I did it in January I financed it and then I had to reregister the car again because the expiration was up in June. I also paid a ticket, went to traffic school, and renewed a driver's license. 2023 was a rough one, and inflation in CA tripled our overall cost of living. All tips anyone has are greatly welcomed!
You need to start by carefully reading chapter 4 of IRS publication 463.
https://www.irs.gov/pub/irs-pdf/p463.pdf
At least one of the experts you quoted was mistaken. The statement "You can only use actual expenses if you used this method THE VERY FIRST YEAR you placed the car into service" is incorrect, it is actually the opposite. The IRS states
If you want to use the standard mileage rate for a car you own, you must choose to use it in the first year the car is available for use in your business. Then, in later years, you can choose to use either the standard mileage rate or actual expenses.
The IRS also states
If you want to use the standard mileage rate for a car you lease, you must use it for the entire lease period.
Assuming you used the standard mileage method in 2019, then you were required to use the standard mileage method for 2020-2022. However, if you bought the car off lease in 2023, then you may use the actual expense method for 2023. If the vehicle is not used 100% for business, the actual expense method requires that you keep track of all your business mileage, your total mileage, and all your expenses (fuel, repairs, maintenance, interest, depreciation, registration fees). You deduct the percentage of total expenses corresponding to the percentage of business use. If your mileage log shows you used the car 60% for business, you can deduct 60% of the expenses. Note that if you are audited, and can't prove your expenses (such as, you don't have all your gas receipts) you may lose the deduction.
The purchase price of the car is not a deductible expense. Instead, you claim depreciation based on the cost. That's how you recover the purchase price. You can include interest on the loan (subject to the business percentage rule) but you must be able to separate the interest portion of the payment from the purchase price portion of the payment. Sales tax is included in the purchase price and depreciated. Registration fees, license plate fee, etc. may be expensed, subject to the percentage rule.
Your problem will be determining the correct basis for depreciation. When you leased the car, you essentially "bought" the first 25% or 50% of the car. This should be specified in your lease agreement. Let's say that was $20,000. Then, for 2019-2022 you used the standard mileage method for your car expenses. The standard mileage method includes about 27¢ per mile for depreciation (although the exact figure varies from year to year). Let's say that over 4 years you claimed 50,000 business miles, so that's $13,500 of depreciation, so your adjusted cost basis is now $6,500. Then, you paid another $22,000 including sales tax to buy the second half of the car. Your basis is now $28,500. That's how you must calculate your current cost basis so you can calculate the amount of depreciation you can claim as an expense on your 2023 tax return. If you can't prove your prior mileage (because you don't have records), then any deduction for depreciation could be disallowed if audited.
You may want professional assistance this year if you really want to use the actual expense method, to get the calculation right. Remember that with the standard mileage method, the only thing you have to prove if audited is your business miles, usually from a diary, log book or expense tracking app. If you want to use the actual expense method, you must be able to prove every expense, along with all your business mileage, and also prove your prior business mileage deductions.
Fines for breaking the law are never deductible business expenses (such as a speeding ticket), neither would be traffic school to get your license back. If you are a commercial driver and a CDL is required for your business, you can probably deduct the additional cost of a CDL renewal compared to the cost of a standard drivers license.