Buying a vehicle not only provides a safe method of transportation to carry out business functions, but also results in lower taxable income. You may be able to claim the special depreciation allowance for your car, truck, or van if it is qualified property and was placed in service in 2021 or 2022. There are two main methods for claiming the auto deduction: the actual method and the mileage method.
The first-year bonus depreciation deduction changes as of January 1, 2023 according to the following schedule: 80% for property placed in service during 2023 and 60% for property placed in service for 2024.
If the actual method is used, you may be able to write off a portion of the cost each year; however, you cannot write off the cost in any of the years after you use the standard mileage method.
The Actual Method
The actual method allows business owners to utilize special depreciation methods while still claiming the expenses associated with the vehicle. For 2021 and 2022, you can write the entire cost-basis of the vehicle off in the year it was purchased under Section 179 first, then the rest with Bonus Depreciation. SUVs with loaded vehicle weights over 6,000 pounds, but under 14,000 pounds can expense 100% of the cost under Bonus Depreciation. This results in a large reduction in taxable income with the potential for additional savings depending on if you incur the following expenses:
· Repairs and maintenance
· Gas and oil
· Garage rent
· Car insurance
· Loan interest
· Registration fees and licenses
· Rental or lease payments
· Tolls and parking
New and pre-owned vehicles put in service during 2021 & 2022, assuming the vehicle was used 100% for business, can take a maximum first-year depreciation under Section 179 of $10,200 and an additional $8,000 in Bonus Depreciation when the weight limit rules apply.
The Mileage Method
On the contrary, the mileage method takes a fixed rate of depreciation based on the business miles of the vehicle. With this method, you can still take certain expenses associated with the car; however, these expenses come with limitations, and you cannot utilize special depreciation options. Moreover, self-employed individuals can claim 58.5 cents for every mile driven for work in the first half of 2022 and 62.5 cents for the remainder of 2022, but only if the standard mileage method is used. The following trips count as qualifying mileage:
· Driving from your office to client meetings
· Trips to the bank, post office, or office supply stores
· Traveling from the office to meet with accountants or attorneys
· Driving from your main office location to another office location
Choosing Between the Methods
There are a few different factors to consider to choose the right method for your business. First, once you use actual expenses for the vehicle, even in the first year placed in service, you can’t switch to the standard mileage rate. You must continue to use the actual expense method for as long as the car is used for business purposes. However, if you use the standard mileage rate in the year you place the car in service, you can switch to the actual expense method in a later year before the car is fully depreciated. You are required to use straight-line depreciation over the estimated remaining useful life of the car, which prevents you from taking Bonus Depreciation.
Understanding the tax implications of purchasing a vehicle for your business, including the different methods, is critical to enjoying the most tax savings as a business owner. For more information on the type of auto expenses you are entitled to take or how to implement the actual method, contact Abdul Tax Consulting and Accounting Services. Consulting with an expert is recommended to properly account for your business vehicle. Reach out today for more information.