If you wanna go and take a ride with me we depreciatin’ the fo’ with the gold D’s

 

If you use your vehicle for work, there’s probably a great deduction to be had if you’re willing to do the documentation!

 

What can I deduct and how? - Here’s the TL:DR

  • Deducting using the “Standard Mileage Rate” is the easiest way, just track your mileage and deduct 62 cents per mile driven for business

  • Bonus and S179 deductions can get you an even larger first year deduction when you purchase a vehicle, but special limits apply.

  • “Business use” doesn’t include commuting to your regular place of work, but does include driving to clients, events, networking and other business related functions.

  • To take the deductions, you need to keep records of your business use of the vehicle. No records = no deduction!

Now to the most common FAQ’s

I use my car all the time for work, can I deduct my car payments? - Not exactly. The IRS has very specific rules around how to take the deductions for vehicles, and they fall into two categories, “Standard Mileage” and “Actual Costs”

Cool, so I can deduct all my actual costs? - Kinda, but not really. Even under the actual costs method, your deduction is based on your business use % (determined based on biz miles vs total miles). Under actual costs, you can deduct items like gas, repairs, insurance, lease payments, loan interest (not loan principal) depreciation (more on that below), tolls and parking. All of these costs together represent your “actual costs” then, for example if you drove 2K miles for business and 10K miles for the year, you’d take 20% (2k/10k) of the total for your deduction.

That sounds like a lot of tracking, is there a simpler way? - YES! That’s why the IRS gave us the “Standard Mileage” rate. Rather than tracking all of the above, you just need to track your mileage, and then the IRS gives you a standard “cents per mile” deduction. For 2022, it was 58.5 cents through 6/30 then they increased it to 62.5 cents per mile for July through Dec due to increased fuel prices.

Wait, what is “Depreciation”? Instead of writing off the amount you pay for your car payments, the IRS instead says that you need to spread out the total cost of the vehicle over time, usually over a 5 year period. The good news is that when using the “actual costs” method, this can often get you a bigger first year deduction.



”But Ben, all my friends are deducting their cars, I want a deduction NOW!!!!!”

Wouldn’t it be neat if you could write off 100% of the cost of that new car this year, before you’ve even made any payments?

To write off up to 100% of the cost of the vehicle in 2022 it needs to:

  • be placed in service in 2022 (e.g. you gotta take delivery this year!)

  • be used more than 50% of the time for business (100% of the time for biz to qualify for the full 100% deduction, anything less than that is prorated)

  • Weigh over 6K lb gross unloaded weight

  • In 2023, the rules are changing and the maximum deduction for most passenger vehicles will be 80%

  • This deduction is for federal taxes, but many states don’t allow the 100% bonus deduction

If you don’t meet the above requirements, you can still write off up to $19,200 in the first year if:

  • It’s placed in service in 2022 (otherwise it’s a 2023 deduction)

  • be used more than 50% of the time for business (100% to qualify for the full deduction, anything less than that is prorated)

  • Any costs you don’t get to use in the first year get spread out as deductions over the next 5 years

And if you don’t meet those, there’s always the standard mileage rate!

There’s still some nuance to this that we’ve skipped over because this is a quick summary, so before you run out and get that new G-wagon, touch base with us so we can think about it strategically with you for both the best deduction, but also what makes the most sense.