Knowing how tax codes work can be very beneficial for you as an entrepreneur, and using these tax codes to your advantage will allow you to save lots of money on business expenses. Here are three ways to write off a business vehicle.
The first way to write off a car is to use the standard mileage rate. You can use this method with a car you already own, and you just need to track how many miles you drive for business each month using apps, QuickBooks, or even a spreadsheet. The way this method works is that you receive a vehicle deduction on every mile that you drive for business, called the standard mileage rate. In 2020, the deduction was 57.5 cents per mile, meaning if you drove 10,000 business miles in a year, with that standard mileage rate you’d have a $5,750 deduction on your payment. To use the standard mileage rate, simply tell the IRS what kind of car you have, track your mileage using a spreadsheet or mileage tracker, and receive the deduction. However, make sure that you have legitimate proof of the miles that you’ve driven for the IRS to check, or else you could go to jail for tax fraud.
Method number two of writing off a car is by using the car’s expenses. Expenses on your car would include things like depreciation, lease payments, gas, tires, repairs, and insurance. These can all be deducted if you’re using your car for business, meaning if you are using that vehicle for personal use as well, you would need to separate those expenses as best as possible. The expense method is commonly used by people who lease a car rather than buy one since you can’t write off your car loan payments due to them being liabilities. To use the expense method, first, the IRS is going to ask you what percentage of your vehicle you are using for your business. The higher the percentage of your vehicle you use for business, the closer you are to receiving your car for free. For example, if you lease a car for $1,000 a month and 75% of the car is used for business and 25% of the car is used for personal use, you can write off $750 a month of the lease payments and then 75% of the insurance, registration, gas, and more.
The third method of writing off a car is that if the vehicle weighs over 6,000 lbs, you can use code Section 179 which allows you to expense a business vehicle 100% in the first year with accelerated depreciation. If you buy a car that car costs $150,000, and it weighs more than 6,000 lbs and you can use that car specifically for business, under Section 179 you’re allowed to take 100% expense of accelerated depreciation in the first year. However, if you sell that car and receive a gain, your depreciation amount will need to be repaid, which is called depreciation recapture. For example, if you use accelerated depreciation and you get a $150,000 tax write off in the first year, and then decide to sell the car for $130,000 the next year, you are going to need to repay $120,000 in depreciation and report it as income, so you need to think long-term about which method truly best suits you.
Now, you have to decide which method to use. If you are a business owner who has to drive 60 miles a day, or you have a long daily commute in general, then the standard mileage rate method is likely better for you. However, if you are an influencer and want to use the car mainly for content and not as much for transportation, then the expense method or using section 179 might be a better option for you and your business.