Purchasing a brand-new car is both exciting and nerve racking. New vehicles are a huge expense but if you’re using it for business purposes, you may be able to deduct some of the costs. If you’re an independent contractor or a small business, there are ways you can take advantage of some tax-deductible benefits of buying a new car.
Using Your Car as a Business Expense
You can’t write off the whole purchase of your new car but you can deduct some of the cost from your income. Expenses you can deduct include vehicle sales tax and other types of expenses relating to your car purchase.
Deducting Car Costs Through Section 179
Section 179 is an IRS code you can use to write off types of property on your income taxes. It’s used as incentive for you as a business owner to buy a car and invest in yourself. The IRS will want you the property to be capitalized and depreciated. Your car will have to meet some requirements to quality for Section 179:
- Weight can’t exceed 6,000 pounds (unless it’s an ambulances, hearse, or other heavy vehicles)
- Finance needs to have been used for business before December 31
- It has to be used for business a minimum of half the time
- You can only deduct business-use percentage of the cost of the car. If you use your car 70% of the time for work, you can deduct 70%
- You’ll use Form 4562 to report Section 179 deductions
- To deduct vehicle depreciation, you have to forgo standard mileage deduction
Depreciation Under Section 179
Section 179 lets you write off the whole purchase price of your car in a tax year. This includes business assets like machinery, furniture, cars, and even computers.
Limits on Section 179 deductions
Section 179 lets you deduct the whole cost of your car as long as it qualifies. There are limits however. In 2021, the limit is $1,040.000. Once this spending is capped, you get a bonus depreciation. When it comes to cars, the limit is $10,100 ($18,100 without depreciation.
Deducting car sales tax
You can use this depreciation deduction if you’re using your car for business. Whether or not you specifically purchased it for your work, there are other costs that can be deducted. This includes the sales tax on the purchase of the car.
Writing off vehicle sales tax as a business expense
If you’re driving your car to work, you can deduct sales tax you pay using Schedule C. Add the amount you paid on line 23.
Writing off vehicle sales tax as an itemized personal deduction
Writing off sales tax as an itemized personal deduction is another way to go about it. You can’t use this if you deduct on Schedule C.
If you itemize personal deductions, you can write off state and local sales taxes paid on a new car. In some states, your vehicle purchase won’t come with a sales tax. This includes Alaska, Delaware, Montana, New Hampshire, and Oregon.
Another alternative includes deducting income taxes you paid for the year. You will have to select one option.
These deductions can be reported on Schedule A, a form you use to report your tax-deductible personal expenses.
Schedule A lets you write off your vehicle property tax or tag registration. You’re basically deducting is the ad valorem tax. This replaces the sales tax relating to vehicle registration.
In total, your deduction of state and local income, sales, and property taxes is limited to $10,000.
Deducting interest for financed vehicles
When you finance a new vehicle that you’ll use for work, you aren’t able to deduct the whole monthly bill from your taxes. You can write off a part of your car loan interest. To write off the car loan interest, you need to deduct actual car expenses instead of the standard mileage rate.
Other vehicle tax deductions
If you drive for work, you’ll be spending money on your car after you’re done paying it off. This includes gas, insurance as well as repairs.
There are two methods that the IRS approves of actual car operating expenses and standard mileage rate. They can both be found on the Schedule C, which is used for reporting business expenses. You have to choose one method as you can’t use both at once.
So if you’re thinking about buying a new car and have a business, there are ways you can deduct some expenses. By using the proper forms, you can end up getting some of the expenses back from your big purchase.