Charles Jenkins Jr. Tax Director at DBA, walks through 4 main factors to consider when asking yourself this question. Watch the video here to learn more. Don’t feel like watching? Read on below!
There’s never a dull moment or a slow day in the life of a small business owner. Your tasks keep you going in many different directions all at once, often requiring the use of a vehicle. You may have wondered, “Can I get a tax deduction related to the business use of a vehicle?” The answer is absolutely!
Let’s consider three permissible methods the IRS allows to capture a deduction.
Track Your Mileage
- What type of mileage is deductible?: You will first need to determine what you can categorize as your business miles verses your personal miles. Both are relatively straightforward; however, note that your regular commute to and from your primary place of business is considered personal use of your vehicle. Overall, it’s important to keep consistent and accurate documentation for the IRS.
- What is the best way to do this? The easiest solution is to download a mileage tracker app and use it to continually record your business miles traveled.
- How to calculate your deduction: simply take your business miles for the year and multiply that number by the 2023 standard rate of 65.5 cents per mile.
In documenting your business miles vs. personal miles, you can determine the business percentage of your vehicle. This leads directly to the Actual Cost Method.
To utilize this method, it is important to identify all the actual costs of operating your vehicle:
Multiply the operating costs against the business percentage of your vehicle to calculate the deduction you can claim. (Note: that you must use your vehicle for business purposes more than 50% of the time to take a depreciation deduction.) Again, it is important to have consistent documentation of the numbers in your equation to provide to the IRS, so a mileage tracker is imperative for this approach as well.
The IRS breaks down vehicles into two weight categories: Less than or greater than 6,000 pounds. If the vehicle you use is less than 6,000 pounds, there will be caps on the amount of depreciation you can utilize. If you use a vehicle for your business weighing more than 6,000 pounds, the depreciation that you can pull into the current year will be more significant. In practice, there are more nuances to this rule, so it is good to discuss your vehicle purchase with your tax advisor.
Another factor to consider is selling your vehicle in the future. This is what the IRS calls “depreciation recapture.” Any gain on the vehicle up to the original purchase price is taxed at ordinary income rates since you were able to take depreciation expense that offset ordinary income in a previous year. For example, if you had a $40,000 vehicle and took $10,000 of depreciation in the first year, you then have a $30,000 tax basis remaining. If you sell the car for $35,000 in the future, the $5,000 gain would be "recaptured" and taxed at ordinary rates. Alternatively, if you sold it for $45,000, then $10,000 of the gain would be "recaptured" and taxed at ordinary rates, but the additional $5,000 gain over the original purchase price would be taxed as a capital gain.
If you are thinking of purchasing a vehicle, it’s always advisable to speak with your tax professional and plan what type of vehicle you will purchase, when you will capture the depreciation and deductions, and what might happen in future years when you sell or trade that vehicle. It’s also helpful to discuss and plan for non-tax considerations such as:
- How do you title the vehicle? Will the title be in your personal name or the business’s name?
- Who pays for the costs? Will you pay personally and reimburse yourself, or will the business cover the costs?
- Insurance – regardless if your vehicle’s title is with you personally or with your business, you will want to reach out to your insurance provider to determine any increased rates and liability protection to think through.
Do you have a plan to best utilize tax deductions related to the business use of your vehicle? Find the financial support you need with Dillon Business Advisors. We match businesses with a team of financial advisors who take on the roles of your tax advisor and strategists. With DBA, you can focus on your business’s operations and gain trusted financial partners. Contact us today with any additional questions.
Looking for additional ways to save on taxes? Marcus Dillon, President, and owner of DBA (Dillon Business Advisors) walks through tax savings you may be missing, which will support your efforts to maximize savings and reduce your tax liability.