Many business owners use a car, truck, or van in the course of their operations—to make deliveries, pick up supplies, and visit customers and clients. Tax-wise, there are certain rules that apply to write-offs for the vehicle. Here are eight points you need to know.
1. If you buy the vehicle, write-offs are limited
There is a dollar limit on how much of the purchase price you can deduct. For vehicles purchased in 2009, the dollar limit on your deduction for 2009 is $10,960 for a new one, or $2,960 for a pre-owned vehicle. What’s more, only the portion of the limit related to business driving in the year applies. For example, if you drive your new car for business 75% of the time and for personal use 25% of the time, your dollar limit is $8,220 (75% of $10,960).
- You can deduct the purchase price up to $25,000 if the vehicle is a heavy SUV (weighing more than 6,000 pounds).
- You can deduct the entire purchase price (subject to so-called Sec. 179 deduction limits) if the vehicle is considered a non-personal use vehicle (e.g., it’s a van with permanent shelving, a sign on the outside, and passenger jump seat). For 2009, the cost of non-personal use vehicles can be expensed up to $250,000 as long as the business has profits to this extent (limits apply).
2. If you lease a vehicle, you must pick up income
In an attempt to equate the write-offs for a vehicle, whether it’s owned or leased, the law requires you to add back income if you lease a vehicle. The add-back, called an “inclusion amount,” is based on the car’s value at the time of the lease. Inclusion amounts are usually very modest. For example, if you first lease a vehicle in 2009 that would have cost you $40,000 to buy, the add-back for this year is only $58.
3. Buying an electric vehicle entitles you to a tax credit
Whether you buy the vehicle for personal driving or for business, you can claim a new federal income tax credit.
The extent to which the electric vehicle is used for business driving is part of the general business credit; this acts as a limitation on the current amount of credits that can be claimed.
4. Business car usage can be deducted in two ways
If you use your personal car or truck for business, you can deduct costs related to business driving. The law lets you figure the write-off in two ways:
- The actual expense method—deduct the cost of gasoline, oil, repairs, etc.
- The IRS-set standard mileage rate—deduct the number of business miles driven in 2009 at the rate of 55¢ per mile.
As long as you maintain records of cost, you can choose the method that gives you the greater deduction. Remember, the same 55¢ per mile rate applies whether you’re driving an inexpensive Hyundai or an expensive Lexus.
5. You must have written records of business driving
The law requires you to maintain a record of vehicle usage for business. You must indicate on your return that you have this record and that it is written.
The record can be a daily log in which you enter your date of travel, odometer reading, destination and purchase of each business trip. Alternatively, you can use electronic devices to help track your mileage. For example, iPhone users have an app called Tap2Track Mileage (www.tap2track.com) from Intuit that enables the phone's GPS to track the mileage.
6. Signage doesn’t make it business driving
A low-cost way to advertise your business is posting contact information (a phone number and/or website) on your car or truck. For example, permanent or removable signs installed on the body or window of a vehicle can give you visibility in your area. However, while the cost of the sign is a deductible business expense, using the sign on a personal vehicle does not transform all driving into deductible business mileage. The IRS (www.irs.gov/pub/irs-pdf/p463.pdf), in a 2008 publication that will be updated soon, says only use of the car getting from one place to another for business is deductible.
7. State and local sales tax on a purchase is deductible
Even though you use a vehicle exclusively for personal driving, including getting to and from work, there’s a new write-off for 2009. Whether you itemize or claim the standard deduction, you may be able to deduct state and local sales and excise taxes on the purchase of a vehicle after February 17, 2009, and before January 1, 2010. If you live in a state with no sales tax (Alaska, Delaware, Hawaii, Montana, New Hampshire and Oregon), you can deduct fees imposed by the state or local government related to the vehicle purchase as long as the fees are based on the vehicle’s sales price or as a per unit fee.
There are limitations on this write-off if you claim the standard deduction or itemize and opt to claim this deduction in addition to your state and local income taxes:
- Only taxes related to the sticker price up to $49,500 qualifies.
- Your adjusted gross income can’t exceed certain limits.
If you use your car exclusively for business, the sales tax is part of your cost basis. You’ll write it off as part of your depreciation allowance; you do not separately deduct the sales tax.
8. Cash for clunkers incentive not taxed
If you purchased a car this past summer to take advantage of the “cash for clunkers” program, you aren’t taxed on the incentive. This is true whether you use your car for business or personal driving, or a combination of both.