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For self-employed individuals seeking tax savings by personal vehicle for business use, converting a personal car into a business asset can be a strategic move. This conversion can unlock valuable tax benefits without requiring any additional financial outlay or the necessity of increasing your business mileage. However, whether this conversion is right depends on your circumstances. Consider factors like your business requirements, the extent of business-related vehicle use, and your financial position.

Unlock Tax Benefits: Converting Your Personal Vehicle into a Business Asset

Consider this scenario: Alex and their spouse, Jamie, utilized both cars, resulting in a 73.7 percent business use for each vehicle. Before this arrangement, Alex drove one car and achieved a 93.3 percent business use for it. After making the switch, both cars accumulated business miles.

For individuals who are single and possess two or more vehicles, it’s likely more advantageous to utilize all of them for business purposes. Here’s why, using an example:

Let’s take Taylor, who owns three cars with the following depreciation bases:

  • Vehicle 1: $50,000
  • Vehicle 2: $33,000
  • Vehicle 3: $27,000

If Taylor exclusively uses vehicle 1 for business, the maximum depreciation deduction they can claim is $50,000. However, if they use all three cars for business purposes, the maximum deduction increases to $110,000.

Depreciating Your Former Personal Vehicle for Tax Savings

If you’re a self-employed individual looking to maximize your tax savings, converting your personal vehicle for business use can be a smart move. When you make this conversion, the tax law considers the vehicle as being placed in service for your business from that moment. This allows you to begin claiming depreciation deductions right away.

To determine the basis for depreciation, choose the lesser of:

• The fair market value on the date of conversion from personal to business use.

• The adjusted basis of the property typically includes the amount you initially paid for the vehicle plus any improvement costs.

Let’s illustrate this with an example: Say your spouse bought a personal vehicle for $43,000, but when you convert it to business use, it’s valued at $31,000. In this case, your basis for depreciation is $31,000.

Bonus Depreciation and Section 179 Expensing

Now, when it comes to bonus depreciation and Section 179 expensing, there are some rules to follow:

• You cannot use Section 179 expensing for assets converted from personal to business use.

• However, you can likely take advantage of bonus depreciation. The eligibility depends on when you acquired the vehicle you’re converting:

  • If you acquired the vehicle before September 28, 2017, you may not claim bonus depreciation when converting it to business use in 2023.
  • If you acquired the vehicle on or after September 28, 2017, you can use the current 2023 bonus depreciation rules for the converted vehicle.

To illustrate this further, let’s examine a couple of scenarios:

  1. Mark converted his personal SUV from 2016 into a business asset in 2023. Unfortunately, he cannot claim bonus depreciation on the 2016 SUV.
  2. Lisa converted her personal 2021 SUV, which has a gross vehicle weight rating (GVWR) of over 6,000 pounds, into a business vehicle in 2023 when it was worth $35,000 (much less than the $60,000 she initially paid). Lisa will use the SUV for business purposes 70 percent of the time.
  3. She can deduct $19,600 in bonus depreciation ($35,000 x 70 percent business use x 80 percent bonus depreciation). Additionally, Lisa can claim MACRS depreciation on the remaining basis and 70 percent of her vehicle operating expenses to further maximize her tax savings.

Crucial Bonus Depreciation Rule for Your Tax Strategy

A noteworthy feature of bonus depreciation is that it becomes your default depreciation method unless you specifically opt out on your tax return. This differs from many other tax breaks where you need to take affirmative steps to qualify. With bonus depreciation, you’re automatically eligible unless you choose otherwise.

However, it’s important to exercise caution because when you decide not to opt out of bonus depreciation, the 80 percent bonus depreciation deduction for the year 2023 applies to all assets within that particular class.

Let’s illustrate this with an example: If you put into service a vehicle categorized in the five-year class and also have seven other assets in the same five-year class, you must apply the 80 percent bonus depreciation to either (a) all eight assets or (b) none at all.

Here’s a key takeaway: If you wish to exclude a specific class of assets from bonus depreciation, you must actively elect to do so on your tax return.

Business Vehicle Write-Off: Bonus Depreciation

There are three vital Bonus Depreciation insights for self-employed tax savings with personal vehicles for business use.

Mileage Rate Option

If you’re a self-employed individual and you place a business vehicle into service in 2023 while choosing to use the IRS optional mileage rate of, let’s say, 65.5 cents per mile, here’s a simplified benefit. Your depreciation deduction of 28 cents per mile is already included within the 65.5-cent mileage rate. This means that, for those using the optional mileage rate, there’s no separate bonus or additional depreciation to calculate.

Tax write-off for vehicles over 6000 lbs

Self-employed individuals who own SUVs, crossover vehicles, pickup trucks with beds measuring six feet or more, cargo vans, and certain passenger vans with Gross Vehicle Weight Ratings (GVWRs) exceeding 6,000 pounds are in luck. These vehicles are exempt from the luxury vehicle limits and can qualify for a substantial 2023 bonus depreciation of up to 80 percent.

Bonus Depreciation for Luxury Passenger Vehicles

If you’re self-employed and looking at luxury passenger vehicles, here’s what you need to know. Cars with curb weights of 6,000 pounds or less and SUVs and similar vehicles, as mentioned in the previous point with GVWR of 6,000 pounds or less, but acquired after September 27, 2027, can still qualify for bonus depreciation of up to $8,000. This can be a valuable tax-saving opportunity for self-employed individuals in need of such vehicles.

Key Points to Remember

In the realm of taxes, personal assets, aside from your primary residence, typically offer little in the way of benefits:

  1. You’re subject to taxes on any personal gains.
  2. You often can’t deduct personal losses.

However, the game changes when you transform a personal vehicle or another personal asset into a business asset:

  • This conversion opens up avenues for tax benefits.
  • These newfound tax benefits come your way without requiring any additional expenditure.