How to Deduct Your Car

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How can you write off your car? It’s a question I get frequently about this time every year as people are looking for tax deductions for their business tax returns. We’re going to look at several ways you may be able to write off all or part of your car against your income.  

Charity & Medical Mileage 

If you use your vehicle for charity work, you can take a deduction for 14 cents per mile. Remember in 2020, you have two different ways to take a charitable deduction. You can take it as part of your itemized deductions (if you itemize) or you can take a charity deduction above the line for up to $300.  

For medical mileage, you can deduct 17 cents a mile. It would count as a medical expense and can be part of your itemized deductions provided your total expenses are over 7.5% of your adjusted gross income. 
However, if you have a business and the right business structure (Schedule C that employs your spouse) or C Corporation, you can deduct it through a Medical Expense Reimbursement Plan (MERP).  

Heavy Vehicle 

If you buy a “heavy vehicle”, defined as a vehicle that is over 6,000 GVW, you can take a deduction for Section 179 and/or bonus depreciation. Bottomline, you can take a write-off for 100% of the purchase price of your vehicle. That’s true even if you finance the vehicle. 

However, that assumes that you are using the vehicle for 100% business. If you only are using it for 75%, for example, then you can only write-off 75% of the heavy vehicle purchase price.  

If you lease a heavy vehicle, you don’t get the same write-off. You have to buy it.  

You also can take the business use percentage of your auto expenses such as interest, insurance, gas, repairs, maintenance and the like.  

Standard Mileage Rate or % of Business Use 

In 2020, the standard mileage rate was 57.6 cents for business use.  If you choose the standard mileage rate, you cannot deduct actual car operating expenses.  

The only expenses you can deduct if you use the standard mileage are: 

  • interest on a car loan 
  • parking fees and tolls for business trips  
  • personal property tax that you paid when you bought the vehicle, based on its value.  

Rules Regarding Standard Mileage and Business Percentage 

You must use the standard mileage rate in the first year you use a car for business or you are forever disallowed from using that method for that car.  

If you use the standard mileage rate the first year, you can switch to the actual expense method in a later year, and then switch back and forth between the two methods after that.  

However, this rule does not apply to leased cars. If you lease your car, you must use the standard mileage rate for the entire lease period if you use it in the first year. 

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. 

Employees Can’t Take a Deduction for Auto Use 

If you are an employee, you cannot take a deduction for work use of your personal car.  

Commuter Miles Do Not Count 

Commuter miles, miles from your home to your place of business, do not count as business miles. As soon as you  

Auto usage/miles for business does not include mileage if you are an employee. Does not include commuter miles.  

The answer is to start a business and make sure you have a home office.  

Leased Vehicles 

When the value of the leased vehicle is above a certain amount, you must also subtract an “income inclusion” amount from the deductible amount of your lease. This income inclusion rule is an attempt to equalize the tax benefits from leasing and owning business vehicles. 

For vehicles first leased in 2020, the threshold is $50,000. 

What’s Deductible?  

It depends. Just about anything can be deductible in the right circumstances.  

Auto expenses, though, are one of those type of deductions that most people can take if they know the rules. For other types of expenses, take a look at where you spend your money now.  

For each expense, as yourself, “How could this be a legitimate business deduction?” In order to be deductible as a business expense, it must be ordinary and necessary to the production of income. 
You need to have good record-keeping habits so you can track the expenses come tax time.  

 How can you pay less tax? Look for deductions. Practice income splitting strategies. Change the character of your income. Look for tax credits. These are all strategies we regularly discuss as part of the Wednesday coaching.  

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