Can my business buy a car for a tax write off?

Here are the quick and simple answers to whether or not you can buy a car with your business for a tax deduction.

Business car as a tax write off – ownership does NOT matter

Whether or not your vehicle is owned by your business or owed by you personally does not matter.

Business vehicle use is (generally) tax deductible, and personal use is not tax deductible, regardless of ownership.

Also note that commuting is considered to be personal use.

Here are some examples:

If you own the vehicle (and your business does not), and your drive the vehicle 90% for business, for example, if you are a realtor, then 90% of the vehicles expenses will likely be deductible.

In another example, let’s say your business buy a car but you only use it about 10% for business, like if you are a hair stylist just going to the shop to pick up supplies and things. The rest of the time you use the car, it is for personal reasons. In this case, even though the business owns the car, you can only take about 10% of most of your car expenses.

So as you can see, it is the “business use” of a vehicle that dictates the deduction. Ownership is not important in the eyes of the IRS.

Note: There are some exceptions. If you are an s corporation, you might be subject to reimbursement rules under an accountable plan. Or if you are a large company with many employees and/or are taxed as a c corporation, the rules for this might also be different.

This advice is generally for sole proprietors.

Tax deductible vehicle expenses

The IRS is suspicious of 100% vehicle use for many small business.

Let’s say that you are an online consultant. Do you really NEED to spend $40,000 on a second car that is exclusively used for business? That’s going to be hard to substantiate to the IRS.

The IRS will likely assume that you have some mixed use, disallow the expenses, and hit you with taxes and extra penalties.

Car expenses must be ordinary, necessary, and reasonable to be deducted

Let’s say the you do a “repair” to your car and you replace the stock rims with gold wheels.

Is that ordinary?

No. Most online consultants do not have gold rims on their car for business purposes.

Is it necessary?

No.

It it reasonable?

Nope.

So not all business vehicle expenses are deductible, they must be ordinary ,necessary, and reasonable to be considered for a business use deduction.

There are also rules limiting the cost of the vehicle

You can’t just go out and buy a Lambo or a $200,000 Tesla and then deduct it as if it is necessary.

“But I really need that Rolls Royce to go to the post office”.

OK, I understand. You can get that luxury car if you want. I won’t judge. But the IRS will have a limit on how much of it you can deduct.

How to take business vehicle use as a tax deduction

To deduct business car expenses when using a car for both business and personal use, the IRS requires(!) a written log of your business, personal, and commuting miles.

You have to keep a log by writing it down or using a modern app to help you.

If your car expenses meet the ordinary, necessary, and reasonable requirements, you can deduct your expenses according to the RATIO of business to personal use.

For example, if you drive 5000 miles for business, and 5000 miles for personal uses (50%/50%), and you have $6400 in expenses, you would likely be able to deduct $3200 of the auto expenses for that year.

To make things a bit easier for you, the IRS also allows a “standard mileage deduction” where the IRS allows you to take a certain amount deduction per mile. This amount fluctuates with inflation and the price of oil and the IRS updates this amount for each tax year.

Be careful, however, as the IRS does not allow you to switch to the standard mileage rate for a specific vehicle once you started using the actual expense method.

The standard mileage rate deduction also requires a written log of your miles.

If you would like to hire us to prepare your small business taxes, please contact us here.

Please note that our turnaround times around the deadlines can e as much as 6 weeks.

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