One common expense to many businesses arises from the use of a vehicle. The good news is that the IRS recognizes the expense and allows taxpayers who use a vehicle for business purposes to deduct the portion used for business purposes. Here are three things you should know to take advantage of the deductions allowed.

Actual Expenses vs. Standard Milage

Only the percent used for business purposes can be deducted meaning if the car is only used 60% for business purposes only 60% of the costs can be deducted. There are two methods for computing the expenses related to the vehicle: the actual cost method and the standard mileage method. Taxpayers can use whichever method produces a larger deduction. With the standard mileage rate, business miles should be kept in a log for documentation. The miles are multiplied by the IRS standard mileage rate to calculate the deduction. For 2020 that amount is 57.5 cents per mile. With the actual cost method mileage as well as other expenses such as gas and taxes must be kept track of.

Depreciation

If the standard mileage rate is used for calculating vehicle expenses, then an amount for depreciation has already been included in the IRS rate. However, with the actual cost method, the vehicle can be depreciated using Bonus (special) depreciation or section 179 in the first year and MACRS in later years.

Bonus depreciation allows for depreciation of up to 8K in the first year and can be applied to both new and used cars. The vehicle does have to be used more than 50% for business and the depreciation deduction will be adjusted based on the business use percentage to next year.

With section 179 up to 10K can be deducted in the first year for cars and up to 25K for trucks/SUVs (vehicles with gross weight more than 6,000 lbs.). Just like bonus depreciation the vehicle must be used more than 50% for business purposes. Using two methods allows the taxpayer to deduct up to 18K in the first year in a car. If the business is in a loss situation section 179 depreciation will carry forward to

Tax Credit

Finally, there is credit available for people who invest in electric cars. It is a base of $2,500, plus an additional $417 for the first five kilowatts of battery power and an additional $417 for each kilowatt after. The availability of this credit and the amount depend on the vehicle you buy so it is wise to verify before making the purchase if the credit is a deciding factor in your choice. Some states also offer tax credit for the purchase of electric vehicles.

For more information on business expenses and depreciation or if you need help with tax preparation, contact our tax professionals at The Innovative CPA Group at 203-489-0612.  Or contact us online.

Written By Rachel Schulze