Thinking About Buying a Car or Van?

Claiming expenses when buying a new or used vehicle can be complicated.

But, don't make a decision to buy a vehicle just based on the tax benefits.

When buying a vehicle you have two choices in how to claim expenses. You can use the standard mileage rate or claim the business portion of the actual expenses of the vehicle.

The standard mileage rate for 2022 is $.58 per business mile.  In addition, you can claim expenses for tolls, parking and the business portion of car loan interest and any state property tax. See my article: "Claiming Vehicle Expenses - The Standard Mileage Method."

The Actual Expenses Method

When using the actual expenses method to claim vehicle expenses you can deduct the business portion of: gas, oil, repairs, car insurance, parking, tolls, car wash, new tires, car loan interest, depreciation on the car and anything else to keep your car going.

The business portion of these expenses is based on how many business miles you drive divided by the total number of miles you drove the vehicle in a year.

Here's the good news.

You can also deduct most, if not all of the cost of a new or used vehicle in one year, without having to depreciate it.

The rules for how much you can claim in depreciation in the first year you start using the vehicle in your business depend in part on whether you use it more or less than 50% for your business and whether or not it weighs 6,000 pounds or more. The amount you can claim in depreciation changes each year.

Which method is better?

Words of Caution

You never want to buy a vehicle just to get a big tax deduction. For example, receiving a $20,000 depreciation deduction doesn't mean your taxes will go down by this amount. You are probably in a 30-40% tax bracket, so your tax savings would be about $6,000 - $8,000 on the purchase of a $20,000 vehicle.

Leasing a vehicle is also not a good idea because you will spend more in the long run than if you buy. Because the value of any vehicle you purchase will decline in value rapidly, I recommend paying cash for any vehicle purchase. This may not be possible the next time you are ready to buy a vehicle. But, in the long run it makes sense to create a car replacement fund to save money to enable you to pay cash eventually. If you are putting 20% down on your next vehicle purchase, try to put 40% down the next time.

If you need to buy a new vehicle, go ahead and take advantage of the tax deductions either of the above methods have to offer. However, don't let the ability to deduct a major portion of the cost in 2018 overly influence your decision.

Tom Copeland - www.tomcopelandblog.com

Image credit: https://www.stockvault.net/photo/254534/buying-a-new-car

For a further discussion of car expenses, see my book Family Child Care Tax Workbook and Organizer.