If you’re eligible to depreciate a car for business, you owe it to yourself to claim the benefit on your taxes. Yet confusion on the specifics of depreciation, from the accounting methods to tax benefits, paralyzes risk-averse business owners. It’s a real problem.
Fortunately, nearly every problem has a solution:
Problem – Many business owners are eligible for vehicle depreciation and do not take advantage of it to spread out costs and get valuable tax credits.
Solution – Business owners need to learn what depreciation is and whether their business is eligible for depreciation tax deductions.
Who’s eligible for depreciation? Two examples.
Specific: How depreciation helps real estate agents
Let’s say you’re a real estate agent who travels all over DFW for showings.
Is your vehicle integral to your business? Is it driven harder and further than personal vehicles? If the answer is yes, you should account for depreciation and apply for depreciation tax credits.
Broad: How depreciation can help any business
I’ll back away from “vehicle” and ask the same questions in broader terms: do you use the asset regularly for business purposes? Is its value affected by continuous use? Again, depreciation and tax credits may be in the cards for you and your business.
The truth is that the IRS is a rational and purposeful agency. They like taking your business’ money—true. But do they want to destroy your business? No way.
Because there’d be no more money to take from your business if the IRS tanked it.
So, the IRS makes it easier for businesses to get the tools, equipment, and transportation to generate income because a healthy portion of that income will go to the IRS. Logical, right?
Replace “vindictive IRS” with “rational IRS,” and you’ll learn how to depreciate a car for business.
How do you depreciate vehicles and save money?
Depreciation is an accounting principle first. Executed correctly, depreciation on an asset translates directly into a tax deduction that reduces taxes for your business.
Car depreciation lets you allocate costs over time
Depreciation reflects the wear and tear on the vehicle as you use it for business. By depreciating the vehicle, you can deduct a portion of its cost each year on your tax return, which reduces your taxable income.
Long story short: you save money, avoid disruptions in cash flow, and reduce tax payments.
Here are three rules for depreciating a car
According to the IRS, there are three rules for depreciating a vehicle. You must
- Use the vehicle for business;
- Own the vehicle for more than one year; and
- Be able to determine the useful life of the vehicle.¹
And there are two methods for depreciating your car
Here are the two ways you can depreciate a vehicle for business purposes:
- Standard mileage rate method
- Actual expenses method
Simple: The Standard mileage method
The standard mileage rate method allows businesses to deduct a standard rate per mile driven for business purposes. The rate covers all vehicle expenses, including depreciation, maintenance, insurance, and fuel.
The standard mileage rate varies each year. For 2023, it’s 65.5 cents per mile.²
A little less simple: Actual expenses method
With the actual expenses method, you’ll deduct the actual costs of using your car. That’ll include expenses like fuel, insurance, repairs, maintenance, registration fees, and interest on a car loan.
At the end of the year, you calculate the total expenses related to your business usage and multiply it by the percentage of business use to determine the deductible amount.
Attention! You can’t switch accounting methods
Important note: Once you choose to use the actual expenses method for a car, you can’t switch to the mileage method in subsequent years for the exact vehicle.
Carefully consider which method is most advantageous for your business.
Let’s take a look at the limits of depreciation
When it comes to depreciating a car for business, there are limitations. Want a fleet of BMWs for your bakery? Well, there’s no reasonable use for the luxury car, so there’s not slim chance for depreciation. We end up with no money saved just money spent.
You can only write off what you used for business
The amount of the car’s cost that you can depreciate is proportionate to its business use.
If you use the car exclusively for business, the business use percentage is 100%. But if you also use the vehicle for personal purposes, you need to prorate the depreciation based on business versus personal use.
There’s also a limit on luxury cars
The IRS also limits the depreciation a business can claim for high-value vehicles.
The type of vehicle matters
Luxury cars aren’t the only vehicle type with different rules.
Depreciation works well for certain vehicles categorized as transportation equipment. These include:
- SUVs;
- pickup trucks; and
- Other heavy-weight vehicles.
More favorable depreciation rules apply to these vehicles. So keep in mind that it might make more sense to spring for a truck over a sedan.
Consult a CPA for help with car depreciation
Depreciating a vehicle is complicated. The fact is, in this blog, I’ve barely scratched the surface.
You should consult a qualified tax professional to help calculate depreciation and ensure compliance. A CPA can help you navigate the complexities of car depreciation to help you maximize your tax benefits.
I work magic with tax deductions and credits
I’m here to listen and answer questions. I know the nuances and can help you maximize your tax benefits — like how to depreciate a car for business.
Schedule a discovery call with me today.
Talk soon,
Jeremy A. Johnson, CPA
References
- Topic no. 510, business use of car [Internet]. Irs.gov. [cited 2023 Jun 14]. Available from: https://www.irs.gov/taxtopics/tc510
- 2023 Standard Mileage Rates [Internet]. Irs.gov. [cited 2023 Jun 15]. Available from: https://www.irs.gov/pub/irs-drop/n-23-03.pdf