Writing Off Vehicles as Tax Deductions

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You've heard it a hundred times: That shiny new car your buddy just bought? It doesn't absolutely cost him anything. He writes off the car as a tax deduction.

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Your first notion is usually, "That can't be right." Your second notion is, 'I got to frame out how to enjoy that loophole."

But what does the law say? And what are the rules for writing off vehicles? It turns out that you can write off the cost of buying and using a car if you're self-employed and use your car in your business. Specifically, you can probably deduct the firm quantum of your car expenses on your firm tax return.

But this deduction is trickier than most habitancy realize. Here's the first big thing that goofs many habitancy up. You need substantiation to prove your firm use. Ideally, in fact, the Internal earnings assistance wants you to keep a log of your firm miles, your commuting miles, and your personal miles.

With this information, you can then either deduct an amount equal to the firm miles times a accepted per-mile rate of almost $.35 or $.40 a mile (depending on the year)... Or you can deduct the percentage of your car expenses equal to the percentage that your firm miles represent.

Note that only your firm miles-and not your commuting miles or personal miles are deductible.

For example, if your firm use equals 5,000 miles, personal use equals 3000, and commuting equals 2000 miles, your total miles for the year equal 10,000. firm miles as a percentage of total miles equal 50% because 5,000 divided by 10,000 equals .5 or 50%.

In this example, you could therefore deduct 50% of your fuel, 50% of your insurance, 50% of your maintenance and repairs, 50% of the car loan interest, 50% of the depreciation, and so on, as a firm deduction. This means you can't ever deduct all the costs of owning and running vehicle-only the firm use of a vehicle.

If you don't have exact records about your firm use, you can sometimes use good sampling. For example, if you keep a good appointment calendar of your firm activities, one popular tax reference suggests that you can look at the total business, personal and commuting miles driven during one week each month. Then, you can average this data to get good weekly estimates of your business, personal, and commuting miles. Finally, you can multiple these weekly estimates by 52 (the amount of weeks in a year) to get reasonable estimates of your business, personal and commuting miles.

But before you go out and buy a new luxury auto, you need to know there's another complication. Congress limits in most cases the amount of depreciation or lease rental that you can consist of in your car charge calculations. The rules are a bit tricky, but essentially, for purposes of car depreciation and lease payments, you only get to look at the first ,000 (roughly) of car cost. In other words, if you buy a ,000 car and your friend buys a ,000 vehicle, you may both have the same firm depreciation expense-even though your car costs four times what your friend's does.

One other connected point: You may have heard about the sport utility car loophole. This Suv loophole absolutely does exist. Specially, the luxury auto limits mentioned above don't apply to sport utility vehicles that weigh more than 6,000 lbs. Note that Congress partially concluded that loophole in 2004, however, by saying that a special, super-accelerated form of depreciation called Sec. 179 depreciation couldn't be used to write off all of the cost of an expensive Suv in the year the car is purchased.

Writing Off Vehicles as Tax Deductions