Maximizing The Deductibility Of A Car

Arin V., EA , MBA

Arin is an Enrolled Agent (EA), authorized to represent taxpayers in front of the IRS, and holds a BA and MBA (Management) degree from California State University, Northridge.

There are few things that define daily life in the United States more accurately than the concept of car ownership. Indeed, America’s obsession with the automobile is well-documented and this obsession is showing no sign of slowing down. Therefore, it makes sense to try to maximize the deductibility of your car; specifically, when it is used for business purposes.

Some of the criteria that one should consider when trying to maximize the deductibility of a car includes the percentage of business use versus personal use, whether to write off expenses by using the standard mileage rate versus actual expenses, and, how to depreciate the automobile. We will be discussing each of these points, here.

If you use your car only for business purposes, then you may deduct its entire cost of ownership and operation, which includes items such as gasoline, insurance, maintenance, parking, repairs, and so forth. However, if you use the car for both business and personal purposes, you may deduct only the cost of its business use. In this scenario, if you were using the car for business purposes only 50 percent of the time, then you would only be able to deduct 50 percent of the expenses.

In terms of deducting car expenses, you can use either the standard mileage rate method or the actual expense method. For tax year 2021, the standard mileage rate is 56 cents per mile driven for business purposes. To be able to use the standard mileage rate, you must meet certain criteria, such as not having operated five or more cars at the same time, not having claimed a depreciation deduction for the car using any method other than straight-line depreciation (which we will discuss later in this article), not having claimed a Section 179 deduction on the car, and so forth.

To use the standard mileage rate for a car that you own, you must choose to use it in the first year the car is available for use in your business. Then, in later years, you can choose to use the standard mileage rate or actual expenses. For a car that you lease, you must use the standard mileage rate method for the entire lease period (including renewals) if you choose the standard mileage rate.

If you prefer to deduct actual expenses rather than use the standard mileage rate method, you will need to keep meticulous records of what it costs to operate the vehicle. This means that you would need to keep track of expenses such as gasoline, oil changes, repairs, insurance, lease payments, and so forth. Of course, the actual expenses that are deductible is based upon your business usage of the vehicle, versus personal usage.

Generally speaking, if you will be driving a lot for business purposes and if you have an inexpensive car, it is better to use the standard mileage rate, whereas if you won’t be driving much for business but have an expensive car or a vehicle with higher operating costs, it’s generally better to deduct the actual expenses. Whether you decide to use the standard mileage rate method or the actual expense method, make sure to take detailed records of the number of miles you drove the entire year, and then, the number of miles you drove for business that same year.

Another way to maximize deductibility of your car is to take a depreciation expense. Generally, cars are depreciated over a period of five years. You can decide to use straight-line depreciation, which writes off 20 percent of the vehicle per year for five years, or, in some scenarios, you may use accelerated or bonus depreciation, which would allow you to write off a greater percentage of the car during the first year it is placed into service. Of course, there are limits on how much depreciation you can deduct. Please note that if you use the standard mileage rate and not actual expenses, you won’t be able to take an additional depreciation expense.

Also, did you know that recent changes in the tax law stipulate that certain heavy vehicles now qualify for 100 percent bonus depreciation during the first year (for vehicles purchased and placed into service between September 28, 2017 and December 31, 2022)? In this scenario, certain vehicles that are over 6,000 pounds in weight can qualify for both first-year bonus depreciation and Section 179 depreciation if they are used more than 50 percent of the time in your business. This could result in a huge tax deduction for your business.

It goes without saying that the law requires that you substantiate your expenses by keeping adequate records and evidence, in writing.

Also, given the many exceptions, limits, and rules around deducting automobile expenses and depreciation, if you would like to maximize the deductibility of your vehicle or are considering placing a car into service in your business, please get in touch with us today to strategize how to do this in the right way.