The CCPA: Vehicle Deductions & Expenses

Vehicle Deductions & Expenses

This time of year we frequently receive questions about vehicles and how to optimize tax write-offs related to them. Maybe you’ve seen the TikToks about how to get a G Wagon for free (spoiler alert: you can’t) or maybe you’ve heard friends talk about how they write off all of their vehicle expenses… either way, the model year has changed and you’re ready to buy a new ride while maxing out your write-offs.

Generally speaking, this purchase can be an important tax matter. If you use a vehicle as part of your business operations, such as delivering products, driving to clients, or driving between worksites, you may be eligible for certain tax deductions. There are some important details to consider, however, and Harmony is here to help!

Let’s dive in on what you can include, when you can do it, and how to write off these expenses.

Qualifications and Record Keeping

The first question is whether or not your vehicle qualifies as a business use vehicle in the first place. To qualify as for business use, a vehicle must be used more than 50% of the time for business purposes. Establishing usage is where record keeping becomes important: documenting your mileage and expenses is crucial in case you are audited, so you should keep a contemporaneous mileage log tracking all of the mileage you incur with the vehicle. The log should track the starting and ending points of each trip, the miles traveled, and the purpose of the travel: business or personal. You can reach out to your team here at Harmony for a mileage log template, or use an app like MileIQ to track it.

Mileage from your home to your office or regular place of work counts as commuting mileage, not as a business mileage expense, but miles spent traveling after you get to your office (for example, if you leave the office to travel to see a client) will count towards your business miles.

Don’t have 50% business mileage? Don’t fret.

You can always have your business reimburse you for the business miles you drive. Reimbursement is easy: each year the IRS publishes a maximum mileage reimbursement rate (in 2023 the rate is 65.5 cents per mile!) and you can reimburse yourself, tax-free, for any miles driven at a reimbursement rate that is equal to or less than this rate. So even if your vehicle is primarily a personal use vehicle, you can turn in a mileage log for business miles (each week, month, quarter, or year) and get reimbursed up to $655 for every 1,000 miles you drive. That’ll offset some of these crazy gas prices!

Have 50%+ business mileage?

Well, you’re in luck - now you get to decide how to deduct your vehicle for the most effective write offs.

Option 1: Mileage Deductions

A taxpayer who has a business use vehicle may decide that the best way to max out tax deductions for the use of the vehicle is to deduct the standard mileage rate. This is often best applied to vehicles that are driven a high number of miles and ineligible for the Section 179 or Bonus Depreciation allowances (e.g. cars have limits on first year depreciation, whereas heavy SUVs are eligible for large depreciation write-offs in the first year – we wrote about depreciation).

If you use the standard mileage deduction, you can’t include other costs related to the car except for tolls and parking fees (not at your workplace, though, as those are considered commuting expenses). In this case you must keep a detailed mileage log and then multiply the business miles you drove by the standard mileage rate.

To use the standard mileage rate, you must use it during the first year your business uses the car.

Option 2: Actual Expenses

A taxpayer who has a business use vehicle may decide that the standard mileage rate isn’t the best option and instead use actual expenses. In this case, you must keep a mileage log as well as track of all qualifying car-related expenses, including items like:

• Depreciation

• Gas

• Oil

• Tolls

• Insurance

• Repairs

• Registration Fees

• Cleaning Costs

• Licenses

Once you’ve tracked these expenses for the year, you then turn them in to your CPA and we deduct the percentage of the expense total that is business use. 

Bonus Depreciation for Large Vehicles

Ordinarily, there are caps on the depreciation amount for passenger vehicles. For vehicles with a GVWR of 6,000 lbs or less, the depreciation caps are relatively low. For vehicles over 6,000 lbs, such as trucks or SUVs, however, the caps are higher or may not apply. Bonus depreciation for large vehicles allows businesses to take an accelerated depreciation deduction in the first year the asset is placed in service. It is a tax incentive to encourage businesses to buy equipment and invest in capital assets.

Qualifying vehicles should be new or considered “new to you,” meaning it can be pre-owned but new to your business. Generally, vehicles with a gross vehicle weight rating (GVWR) of more than 6,000 lbs qualify for bonus depreciation (think larger SUVs and Trucks, but ask your dealer or Google the specific GVWR on the vehicle you are considering purchasing).

Example: Suppose you purchased a new SUV for $75,000 in 2023 for your business, and it’s used 100% for business purposes, and the GVWR is over 6,000 lbs. The IRS allows 80% bonus depreciation in 2023, so you will be able to deduct $60,000 of the full $75,000 as Bonus Depreciation on your 2023 tax return (plus other actual expenses, like gas, repairs, etc). This is where the “Free G-Wagon” charlatanism originates.

So Which One Is Right For Me and How Do I…

The #1 Rule: If you’re looking to buy a new vehicle and want to make sure you are doing it in a tax efficient manner, reach out to your team here at Harmony and we’ll walk you through the decisions. Sometimes there is as much art as science to the tax choices you make - one taxpayer may expect to drive a low cost car 40,000 miles a year and another may expect to drive an expensive large SUV only 5,000 miles a year, the tax efficient approach is completely different depending on the facts at play, so we can help you analyze it.

As the GEICO commercial says, 15 minutes on the phone could save you 15% or more…

Journal Entries

October 2023

Looking to Move - Yield Signs Ahead

In an effort to fight inflation the Fed has been aggressively hiking rates although inflation cooling and higher long term interest rates mean that the pause of the last two months is likely to continue. The Federal Funds Rate currently sits at  5.33% the highest it's been since 2000.

Higher interest rates historically mean 1) lower returns on equity and other non-interest bearing assets, 2) opportunities for risk-free yield and 3) rising mortgage rates. Mortgage rates track both the Federal Funds rate and investor demand and expectations for the performance of mortgage backed securities. Cooling demand and increased uncertainty has widened the traditional spread between the Funds rate and mortgage rates meaning you can expect 30-year mortgage rates to get more expensive until the Fed actively starts cutting interest rates. Given the supply crisis keeping housing prices high, if you're looking to buy it might be sensible to investigate an adjustable rate mortgage or ask whether the house you buy has an assumable mortgage – a feature of some government backed loans.