If you use cars, trucks, or vans as part of your small business and you plan to write your vehicles off on your taxes, there are several important considerations. Most people think that if they’re a business owner and not an employee, vehicle write-offs are much simpler, but that’s not always the case. You might have at least one vehicle that serves both business and personal uses. You might have company cars owned by your business or partnership. You might want to write off the mileage you pay to employees who use their own vehicles. Knowing the rules and limitations when it comes to business vehicles and your taxes can save you a lot of time and get you the maximum refund you deserve.
1. Writing Off Purchased Vehicles
Tax regulation 179 allows business owners to deduct up to $139,000 for either new or used vehicles they purchased for business purposes. If your new car is only partially for business, you must deduct the portion of time the vehicle was for personal use. There’s typically an exception for extremely heavy vehicles like SUVs. It’s also important to remember that if you purchase an electric vehicle during or after 2010, either for business or personal use, you are entitled to a credit of up to $7,500. The math can be pretty tricky, and you probably need the help of an accountant or other tax preparation service, especially if you purchased more than one vehicle in a year.
2. Dealing with Vehicle Expenses
The most common deduction is mileage, and business owners have the option of choosing between the standard rate for mileage or the actual cost. Whether you go with the standard rate, which is 55.5 cents per mile in 2012, will depend on how many miles to the gallon you get. Larger cars like SUVs are more likely to cost more than the standard rate, which is something your accountant can help you figure out. Besides mileage, there are a host of other vehicle expenses you can potentially deduct. Gas, registration fees, depreciation, and repairs are all legitimate deductions, as long as you have the accurate records to show that they were business expenses. Again, if you have a car that is only used partially for business, there will be math involved in finding out which portion you can deduct. On top of that, the numbers can vary from year to year.
3. Reimbursing Employees
Many small business owners with employees soon discover that it’s much easier and more cost-efficient to have employees use their own cars for business, rather than purchase business vehicles. Employees can document their mileage and receive a reimbursement from the company throughout the year. Not only can the company receive a deduction for vehicle expenses this way, they also don’t have to report the reimbursements as taxable income. It’s a smart way for small businesses who rely on delivery services or other vehicle uses to avoid the costs associated with company cars. But keep in mind that vehicles used as equipment and transport vehicles like taxis and shuttles don’t qualify as business vehicles, no matter who owns them.
4. Keeping Accurate Records
It can be a hassle trying to monitor your business mileage all year long, which is why having a business vehicle that’s owned by a corporation instead of an individual can be an advantage. But if you’re using your personal car for business, there are plenty of mobile apps that help you track your mileage so you can report accurate numbers on your taxes. Remember, just having a sign on your car doesn’t equal business use. Even if you advertise your company’s logo or phone number, the IRS states that only travel for business purposes counts as business mileage. You should also be keeping track of any mechanical work, oil changes, or other repairs you have done, even on a car that is partially for personal use. Don’t be afraid to make these deductions, they’re legitimate and you’re entitled to them.
Knowing the tax rules when it comes to business vehicles can be really tricky, so it’s important to have a good accountant help you decide what you can write off and how to calculate records and receipts. No matter what you use your vehicles for or how you keep track of expenses, you should know that company cars are a valuable and important tax deduction. For small business owners, this can be vitally important to your financial future.