Tax Deduction for Business Use of Your Personal Vehicle
If you use your own vehicle for business purposes, you may be able to take a tax deduction. If you are an employee, you can deduct the expenses as an itemized deduction. If you are self-employed, your expenses can be deducted as a business expense.
If you use your vehicle for transportation related to your work as an employee, you can deduct your expenses for business use of your car, subject to the rules on deductible transportation expenses. You would need to file Form 2106, Employee Business Expenses, and take the deduction as a job-related itemized deduction on Schedule A. If you are self-employed and use your vehicle in your business, your expenses are business expenses, and you would generally report it on Schedule C, C-EZ, or F.
If you qualify, you can deduct your actual expenses or use the standard mileage rate. If you use actual costs, you will need to divide your expenses between deductible transportation expenses and personal expenses. You can allocate these from mileage for each purpose. And if you use the standard mileage rate, you will need to keep track of your mileage for work or business use of your vehicle.
Interest on a Car Loan and Property Taxes
Interest on a loan you take out to purchase a vehicle and property taxes on your vehicle is generally separate thing. These are not included in the standard mileage rate.
Interest you pay on a car loan is personal interest and is generally not deductible. But if you take out a home equity loan, that qualifies to deduct mortgage interest, you may be able to take an itemized deduction for the interest on Schedule A.
If you are self-employed and use the vehicle in your business, you can deduct a percentage of your interest, based on the business use of the car, as a business expense, on Schedule C, C-EZ, or F, for example.
Personal property taxes are by the value of your vehicle can be taken as an itemized deduction, even if you did not use the car for business. If you are self-employed, you can take the business percentage of personal property taxes as a business expense, and the balance as an itemized deduction.
Standard Mileage Rate
The standard mileage rate changes periodically and the Internal Revenue Service (IRS) publishes it. If you elect to use the standard mileage rate for a vehicle that you own, you must use it the first year the car is available for use. After that year, you can use either actual expenses or the standard mileage rate. If you elect to use the standard mileage rate for a vehicle that you lease, you have to use it for the entire lease term.
The standard mileage rate includes an allowance for depreciation, so if you decide to use it, you cannot take depreciation or the special depreciation allowance.
Exceptions to Using Standard Mileage Rate
There are some cases in which you cannot use the standard mileage rate. You cannot use it for cars for hire, such as taxis, or when you employ five or more vehicles at the same time in your business. You are not considered to be using them at the same time if you alternate between vehicles. A rural mail carrier who receives a qualified reimbursement cannot use the standard mileage rate. And, if you are using a vehicle provided by your employer, you cannot use the standard mileage rate.
Expenses in Addition to the Standard Mileage Rate
You can deduct business-related parking fees and tolls in addition to the standard mileage rate, except for parking at your regular place of work, which is considered part of your nondeductible commuting expense.
If you use actual expenses for the use of your vehicle, you can include gas, oil, repairs, tires, insurance, licenses and registration fees, garage rent, parking and tolls, and lease payments or depreciation.
There are three ways to recover the cost of your vehicle for tax purposes when you use the vehicle for business purposes:
- Section 179 deduction
- Special depreciation allowance
- Depreciation deductions
Section 179 Deduction
You can take the section 179 deduction for part or all of the business portion of the cost of a vehicle, instead of taking depreciation over the years. This deduction can be made only in the first year the vehicle of service. You cannot claim a section 179 deduction you started using for personal purposes one year and then starting using for business purposes in a later year.
50% Business Use Test
To qualify for the section 179 deduction, you must use the vehicle more than 50% for business. You then take your business percentage and multiply it by the cost of the vehicle to determine the amount eligible for the section 179 deduction.
Three limits apply to the section 179 deduction:
- There is an overall limit on the amount you can claim as a section 179 deduction for the year. It is a fixed dollar amount that may change periodically. This amount can be found in the instructions and publications the IRS updates each year. And, the total section 179 deduction after limitations cannot be more than your taxable income from the active conduct of a trade or business – the section 179 deduction cannot generate a loss.
- Sports utility and certain other vehicles are subject to a fixed dollar limit on the amount of the vehicle’s cost that you can take into account in calculating the section 179 deduction.
- The total amount of your section 179 deduction and your depreciation deduction for a qualified vehicle you place in service during the year is limited to a certain fixed dollar amount.
Effect on Basis
The section 179 deduction reduces your basis in the vehicle for purposes of calculating depreciation and for calculating an eventual gain or loss on the sale or disposal of the vehicle. Also, if you meet the 50% business use test the first year, and in a subsequent year your business use drops below 50%, you may have to recapture, or include in your income, any excess depreciation in that following year.
How To Claim the Section 179 Deduction
You must claim the section 179 deduction in the year you purchase the vehicle and start using it for business or work. If you are an employee, you need to file Form 2106, Employee Business Expenses. If you are self-employed, you will use Form 4562, Depreciation and Amortization, to claim the deduction.
Special Depreciation Allowance
In the year you buy a vehicle and place it in service, you can deduct 50% of the business portion of the cost as a special depreciation allowance, provided you use the vehicle more than 50% for business or work. You figure the special depreciation allowance after the section 179 deduction, if you choose to claim it, and before calculating depreciation. Both the section 179 deduction and the special depreciation allowance reduce the basis of your vehicle.
Statement of Election Not to Claim Allowance or to Claim 30%
You can choose not to claim this special allowance, or you can request a 30% allowance instead of 50%. If so, you must attach a statement to your tax return, indicating the class of property (5-year property in this case) and that you are electing to claim 30% instead of 50%, or that you are choosing not to claim the special depreciation allowance. The election you make will apply to any other 5-year property you placed in service during the year – the election is made based on a class of property.
If you choose not to claim the special allowance, you need to attach the statement to your return because if you do not, the basis in your vehicle will be reduced by the amount of the allowance, even if you do not claim it.
To calculate depreciation on your vehicle, you need to know the basis, when you placed the vehicle in service, and the depreciation method to use.
If you purchase a vehicle and place it in service the same year, your depreciable basis is the business percentage of the cost, less any section 179 deduction or special depreciation allowance you take. If you convert a vehicle from personal to business use, the basis for depreciation is the fair market value or your adjusted basis in the vehicle on the date of conversion. Your adjusted basis would depend on how you acquired the vehicle (purchased it, received it as a gift or inheritance), and would include any increases or decreases in the original basis, such as permanent improvements or additions to the vehicle, depreciation taken in prior years, or a casualty loss, for example.
Generally, you use the Modified Accelerated Cost Recovery System (MACRS) to depreciate vehicles. But if you used the standard mileage rate to deduct expenses the first year you used the vehicle, you will have to use the straight-line depreciation method if you decide to use actual costs in a later year. Also, to use MACRS, you must use the vehicle more than 50% for business. Otherwise, you must use straight-line.
Accelerated depreciation methods include the 200% declining balance method and the 150% declining balance method. When choosing a depreciation method, you may want to consider which way will give you the most tax advantage, based on your circumstances, financial projections, and tax planning. The 200% declining balance method provides the most significant deductions in the earlier years, followed by the 150% method. The straight-line method offers for regular depreciation deductions over the life of the vehicle.
You can find a MACRS depreciation chart in IRS Publication 463, Travel, Entertainment, Gift, and Car Expenses. Once you determine the basis of your vehicle, when you placed it in service, and the depreciation method you will use, you can use the chart to find your depreciation deduction for the year. There is a limit on the maximum depreciation deduction that can be taken each year, depending on the year in which you placed the vehicle in service. The referenced publication also includes a table with these limitations.