Q&A for Vehicles
Vehicles are expensive, so it makes sense that clients frequently ask us how a vehicle can reduce their taxes. Here are some common questions:
Q – Should my business buy my car/vehicle?
A – No. Buy the vehicle in your name (not the business) and pay for it with non-business money. In 99% of situations, it doesn’t make sense to have your business buy the vehicle. Not only does it not provide any additional tax benefits, but it will actually cost you more. For example insurance for company-owned vehicles is typically more expensive than if owned by an individual because in the event of an accident, people are more likely to sue a company than an individual.
Q – If my business isn’t buying the vehicle, how do I get the deduction?
A – Great question! As described in the next question, you will need to track your mileage. At the end of each month you will submit an expense report to your business and it will reimburse you. Logistically, this means that you fill out an expense report, send it to Independent Contractor Tax Advisors and then transfer money from your business account to your personal account. When your business reimburses you, your business claims the reimbursement as a deduction, reducing the amount of business income that is taxable, which in turn reduces your overall taxes. The reimbursement you receive from your business is not taxable to you – it is tax free income.
Q – What information do I need to track for my vehicle?
A – You’ll want to track how many business miles versus total miles you put on your car in a year. Your business miles divided by your total miles is your percentage of business use. This is a very important percentage because it is the percentage of your vehicle expenses for which you can be reimbursed by your business. You will be submitting your mileage each month on an expense report.
Q – Should I buy or lease my vehicle?
A – Whether you buy or lease has more considerations than just taxes. For example, most leases limit the amount of miles you can drive each year. However, there are some important tax considerations to consider in the “buy vs lease” decision.
When you buy a vehicle and use it in your business, if the purchase price of that vehicle is over a certain limit ($15,800 in 2014), the tax law limits how much you can deduct each year. So, if you buy a $40,000 vehicle, you may have to depreciate the vehicle for a very, very long time—not optimal.
When you lease a vehicle, to the extent that you use the vehicle for business purposes, you can be deducting your vehicle payments. Example: I pay $300/month for a leased Honda and I used it for business 90% of the time. I can deduct $3,240 ($300 x 12 months x 90% usage). There is a very small amount called the “Lease Inclusion” that cannot be deducted, but it is too small to be concerned with. This “Lease Loophole” is the reason why most luxury vehicles on the road are leased.
Q – Can I deduct my spouse’s vehicle?
A – It depends. If your spouse uses their vehicle for business purposes, then the business can reimburse that mileage and get the deduction. However, businesses cannot deduct vehicle expenses if the vehicle isn’t actually used in or for the business. In short, your business won’t get a deduction for your trips to the grocery store.
For more information about deductions click here
When running a small business there is a lot you need to know and more that you need to keep track of, without a lot of recourses that are tailored to your exact situation. At Independent Contractor Tax Advisors, we arm our clients with the tools and expertise to run their business with confidence, knowing their financial matters are in good hands.
Contact us today for a free tax consultation to find out how we can help you save thousands in taxes, and learn how to make the most out of your business deductions.
CLICK HERE FOR A FREE TAX CONSULTATION
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