The options for deducting the business use of a vehicle are both numerous and generous. In fact, there are so many options that some can easily be overlooked. Note: When a vehicle is used both for personal and business use, the expenses must be prorated based on miles driven for each purpose.
Listed below are some of the current options:
- Lease or Purchase – Your first option deals with the manner in which you acquire the vehicle. Whether you decide to lease the vehicle or purchase it, you may choose to deduct the business use of the vehicle using either the actual expense method or the standard cents-per-mile method. Note: If you choose the actual expense method the first year, then the standard cents-per-mile method cannot be used in any future year for that vehicle.
- Trade-In or Sell Old Vehicle – If you are replacing an existing vehicle, you have the option either to trade in the old vehicle or to sell it. Without considering other economic factors, if the sale of the old vehicle would result in a gain, then you may wish to consider trading it in and avoid the need of reporting the gain and instead reduce the cost basis of the replacement vehicle. On the other hand, if the sale will result in a loss, then it would probably be better to sell the vehicle and take the loss on your return.
- Cents-Per-Mile Method – This method requires the least amount of bookkeeping. You need only record the business miles and total miles driven on the vehicle each year, and the business deduction is the business miles multiplied by the rate for the year. Note: This method cannot be used to compute the deductible expenses of five or more autos owned or leased by a taxpayer and used simultaneously, such as in fleet operations.
- Actual Expense Method – As the name implies, this method involves deducting the actual expenses of operating the vehicle. This requires keeping track of the operating costs, including fuel, oil, maintenance, repairs and insurance. In addition, either the annual lease expense or, depending on the class of vehicle, an allowance for wear and tear on the vehicle is added to the annual expenses. A record of the business and total miles must also be maintained to determine the business portion of the expenses.
- Class of Vehicle – The class of vehicle affects the limitations that are applied to the allowances for wear and tear available for a particular vehicle.
A. Vehicles With No Limitations: The following vehicles qualify for the Sec 179 deduction, regular depreciation and for years when permitted by law, first-year bonus depreciation. Depending on the methods selected, virtually any amount of the cost of this type of vehicle can be deducted in the year of purchase.
– Heavy Vehicle – A vehicle exceeding 6,000 pounds gross unladen weight such as many of today’s sport-utility vehicles.
– Qualifying Nonpersonal Use Vehicle – A vehicle that has been specially modified with the result that it is not likely to be used more than a de minimis amount for personal purposes.
– Exempt Vehicles – A vehicle used directly in a taxpayer’s trade or business of transporting persons or property for compensation or hire, such as an ambulance, hearse, taxi, clean fuel vehicles, bus or commuter highway vehicles.
B. Those With Limitations: The following vehicles are limited by the luxury auto rules:
– Luxury Vehicle – Generally, a vehicle costing more than an annually inflation-adjusted threshold ($15,900 to $17,700 for 2016) and not falling into one of the other previous categories. This threshold and the annual limits are not determined until part way through the year.
– Special Trucks & Vans – Defined as passenger autos that are built on a truck chassis, including minivans and sport-utility vehicles (SUVs). These vehicles are subject to the annual luxury vehicle limitations, but are allowed an additional amount (usually $200 or $300, depending on the year purchased) added on to those limitations.
C. Vehicles with Other Limitations: In addition to those described above, there are certain other seldom encountered vehicles, such as electric vehicles and certified clean fuel vehicles, with other special allowances.
- Interest and Taxes – In addition to the other deductions discussed above, the business portion of personal property taxes, license and interest on the debt to purchase the vehicle are also deductible when the vehicle expenses are being deducted on a business schedule.
NOTE: Limitation for Employees – An employee who uses a personal vehicle for business and who qualifies to claim unreimbursed vehicle-related costs must include those expenses as part of the miscellaneous itemized deductions category on Schedule A, and that entire category of expenses is deductible only to the extent the total exceeds 2% of the taxpayer’s adjusted gross income. However, employees are allowed to claim all of the personal property tax portion of their vehicle registration fees as a Schedule A tax expense rather than as part of their employee business expenses.