How Do I Write Off a Business Vehicle?

Nov 02, 2022

One thing I am continually seeing in both our Free Facebook Group and Tax Minimization Program is confusion around business vehicles. Lets take the time here to outline the things you need to know!

We are going to go through a series of decisions you will make when deducting a vehicle in your business.

First things first be sure you have full documentation of the business use of a vehicle. You can not simply put a business logo on a vehicle and think that's enough to make that vehicle a full business deduction. You need support to back up that business use.

Should I Buy or Lease a Vehicle?

This is a question that I want to knock out first but really it is not something that we can advise directly on in a blog post as everyone's situation will be different. However, I can list some questions that will hopefully guide you in the right direction to make a decision on what makes most sense for your situation. Some things to think about:

  • How often do you expect to drive the vehicle?
    • Leases have mileage limits which may not work for your line of business but will simply depend on how many miles you plan to put on.
  • How many years do you plan on keeping the vehicle?
    • If you always want a new vehicle, a lease may be a great option.
  • How much do you want your monthly payment to be?
    • Lease payments are generally less than a loan.  Keep in mind though, you also do not "own" the vehicle.

When looking to get a vehicle this is probably the first thing you need to figure out and hopefully these questions are some guidelines you can use in starting to make that decision.

Should I Put a Vehicle In My Personal or Business Name?

This really comes down to how much of this vehicle is business vs personal. To do that we look at the business use percentage (BUP). That is simply:

  • Business Use Percentage (BUP) = Business Miles / Total Miles

Example: If you used your vehicle for a total of 15,000 miles in a year and your business miles were 12,000 of that, your BUP would be 80% (12,000 / 15,000).

  1. If the vehicle is going to be used mostly for business (>50%), then we would typically recommend putting it in the business name.
    • If you end up having any personal use of the vehicle that is under the business you would add that to your income as an employee (W2) or an owners draw. You can use the lease value rule. Under this rule, you determine the value of an automobile by using its annual lease value. 
  2. If the vehicle is going to be used mostly for personal (>50%), then we would typically recommend putting it in your personal name.
    • If you are an S or C Corp you would use an accountable plan to reimburse yourself for the business use of the vehicle. If you are a sole proprietor or single member LLC you would include the business use on the Schedule C filing.

Note: If you are an S or C Corp, the vehicle must be in the business name and if it is not, use the accountable plan to reimburse yourself for the business use to still get the deduction.

How Do I Write Off a Business Vehicle?

There are two ways you get the determine deduction for the business use of a vehicle, mileage or actual.

  • Mileage Deduction
    • This one is pretty straight forward. You get a specific tax deduction per mile driven. For 2022 the mileage rates are:
      • January thru June: 58.5 Cents per Mile
      • July thru December: 62.5 Cents per Mile
    • With this method, you cannot deduct other expenses related to the vehicle (like maintenance, depreciation, repairs, gas, etc). However you can still deduct parking, tolls and interest expense on the loan (if you purchased the vehicle).

    • Note: If you use your vehicle for business less than 50% of the time, you MUST use the mileage deduction.

  • Actual Expenses
    • For this option you take the business use percentage (BUP) and multiply that by the total actual expenses for the vehicle. These can include: loan interest (if owned), depreciation (if owned), lease payment, fuel, registrations, car washing, repairs and maintenance, insurance, etc.
    • This method complicates things slightly and is where depreciation comes into play. 
    • Note: If you use the actual expense method you cannot also use mileage deduction. It is one or the other.

Put a spreadsheet together and see which option is going to give you a better deduction. You can use the mileage or actual method whether you lease or purchase a vehicle but there are a few things to consider.

  1. Leased Vehicle
    • Once you pick a method you have to stick with it for the life of the lease.
  2. Purchased Vehicle
    • If actual method is selected in year 1, you must continue with that in future years.

    • If mileage method is selected in year 1, you can switch to the actual method in future years but must use straight line depreciation.

Remember, when disposing of a purchased vehicle you will have a gain or loss depending on basis (purchase price less depreciation) in the vehicle. For example, lets say you purchased a $75,000 vehicle and depreciated all of it your basis would be $0. If you then sold it for $45,000 you would have a gain of $45,000.

How Does Depreciation of a Business Vehicle Work?

Awhile back we put together a full Blog post and Small Business Tax Savings Podcast episode on this topic so I recommend you checking that out here, What Do I Need to Know About Purchasing, Deducting, and Depreciating a Business Vehicle?. However, here is a good summary:

  • GVWR Matters – But what is GVWR? It stands for Gross Vehicle Weight Rating and the big thing to know here is whether it is over or under 6,000.
  • There are various depreciation options available: Bonus Depreciation, Section 179 Expensing, MACRS, etc.
  • If your new or used vehicle has a GVWR of more than 6,000 pounds then you have the option to write off 100% of your business cost with bonus depreciation as long as you buy it and place in service before year-end. A few notes on that:
    • As of current law, bonus depreciation in 2022 is 100% but will go down to 80% for 2023, 60% for 2024, 40% in 2025, and 20% in 2026.
    • Bonus depreciation is optional but will give you the highest depreciation in year 1 especially in 2022.
  • If your new or used vehicle has a GVWR or 6,000 pounds or less, you can write off up to $19,200 in 2022 if you buy it and place in service before year-end.

If you want the vehicle deduction this year you need to both purchase the vehicle and put in service before year-end. "Put in service" means driving at least 1 business mile before 12/31.

Again, if you want to learn more about depreciation options and what it may look like for your specific car, check out our previous blog post and podcast episode!

Final Take Aways of a Business Vehicle

  • You need to first decide if you are going to lease or purchase the vehicle.
  • Once you've made that decision determine if you are going to put it under your business or personal name.
    • If the majority of use is going to be business, generally we'd say put it under the business and vice versa if 50% or more is used personally, put it under your personal name and use an accountable plan to take advantage of the deduction.
  • Next you need to decide on if you are going to use the mileage or actual method for the deduction.
    • If business use is less than 50% you must use the mileage method.
    • If business use is 50% or more you can use the mileage or actual method.
  • Always keep a mileage log to prove the business use. Even if it is a 100% business use vehicle you should keep a mileage log to backup the business purpose.
  • If using actual be sure you are tracking all of the related expenses associated with the vehicle.
  • There are various options for depreciation but keep in mind 2022 is the last year, under current law, to utilize 100% bonus depreciation on vehicles with a GVWR of more than 6,000 pounds.

Remember, once the calendar rolls over to the New Year, the majority of tax planning opportunities get tossed out the window. You have time now, take a couple hours to strategize and implement so you can ensure when you file your tax return you are paying the least amount in taxes as legally possible!

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