How to make your tax return work for you with a purchase or lease of a new car

Before you dive into the tax code
Before talking taxes, in terms of buying or leasing vehicles, remember that taxes should only be one factor in your decision. Other criteria to consider include how many miles you drive each year, how long you will keep your vehicle, and how much you can spend on monthly payments.

Tax benefits for the self-employed
There are many auto-related business expenses you can deduct on your taxes. Make sure you know what they are!

For business or pleasure?
If your car is solely for business you can deduct 100% of your expenses. If you use your vehicle for your business and personal use, deduct for the percentage of time you use your vehicle for the business. For example, if you spent $5,000 on lease or loan payments and used your vehicle for business 50% of the time, you could deduct $2,500 on your tax return.

Standard mileage rate versus actual expenses

Whether you buy or lease, you can deduct your auto-related business expenses using standard mileage rate or your actual expenses.

Standard mileage rate
The standard mileage rate for 2017 is 53.5 cents per mile, down from 54 cents in 2016. For more information, see the IRS website’s Publication 463.

To use the standard mileage rate, you must NOT:

operate 5+ cars simultaneously
have claimed a depreciation deduction using a method other than straight-line
have claimed a Section 179 deduction
have claimed the special depreciation allowance
have claimed actual expenses after 1997 for a car you lease
be a rural mail carrier who received a “qualified reimbursement”

If none of the above applies to you, the standard mileage rate could be a good choice.

Actual expenses
Claiming actual expenses is another option. To claim “actual expenses,” simply calculate the actual expenses! Keep track of the total miles you drive and whether the miles traveled are for business purposes or personal reasons. Then deduct the percentage used for business on your taxes.

Expenses you can deduct include the cost of both owning and operating the vehicle. According to TurboTax, you can also deduct parking fees, tolls, gasoline, oil, licenses, insurance, garage rent, parking and registration fees, lease or rental fees, repairs, and tires.

Consistency required
If you own your vehicle, you can use the standard mileage rate the first year and then either stay with it or switch to the actual expenses method the second year. If you lease and you choose the standard mileage rate, you must stay with that method for all subsequent years of the lease.

Loans
If you took out a loan to purchase your vehicle, you can deduct the interest on an auto loan. The portion of interest you can deduct depends on how much you use the car for business. If you lease, you can deduct the business portion of your lease payments as well.

Tax differences between purchased and leased vehicles
You can only depreciate vehicles you own on your taxes.

The lap of luxury and taxes
If you own a luxury car, the tax code limits its depreciation. Referred to as the “lease inclusion amount,” the tax code also (slightly) limits lease payments on luxury cars. Still, generally the more expensive the car, the more preferable leasing becomes tax-wise.

Transportation: Worth its weight in dollars
If you purchased an SUV to transport passengers for jobs like Uber and Lyft, you might be able to deduct up to $25,000 of your vehicle’s cost if you use it more than 50% of the time for your business.

Appreciate depreciation
The Section 179 deduction and special depreciation allowance grants you tax deductions for passenger automobiles, trucks, and vans used for business. If you purchased a car and use it for your business more than 50% of the time, you might be able to claim a tax deduction.

Tax deductions for down payments on cars must be spread over the life of the car. Therefore, the maximum deduction depends on the year it was first placed in service. If you have a luxury car, you might only be able to deduct partial lease payments if the cost is over the annual limit.

Disposing a vehicle
Disposing a vehicle you use for business could mean a taxable gain or deductible loss. Note that gains from depreciation are taxed as ordinary income and leased cars carry no taxable gain or loss.

Hire a professional
Hire a tax professional to help you prepare your taxes and discuss if leasing or buying is right for you and your business.

Contact us
Ready to get a tax break? Call or stop by Thelen Auto Group to learn more about our selection of vehicles and buying options today!

References:
http://smallbusiness.findlaw.com/business-taxes/can-i-claim-a-car-lease-tax-deduction.html

Buy or Lease Your New Business Vehicle?

https://www.irs.gov/newsroom/car-sales-and-excise-tax-deduction-questions-and-answers-0

https://www.irs.gov/newsroom/sales-tax-deduction-for-vehicle-purchases

https://www.irs.gov/publications/p946

https://www.irs.gov/forms-pubs/about-publication-463

Tags: auto related business expenses, standard mileage rate, tax deductions
Posted in Uncategorized | No Comments »