Make informed financial decisions when buying, selling, or leasing a vehicle; it’s the best way to save your hard-earned dollars.
Buying, Selling, or Leasing a Vehicle
1. Determine Trade-in Values. Valuation should take into consideration the make, model, year, mileage, condition, and amenities of the vehicle.
2. Determine Affordability. A loan payment calculator will determine what purchase price you can afford based on your down payment, trade-in value, the current interest rates, and the amount you can afford per month.
3. New Car Values: Determine the suggested resale price of a planned new car purchase.
4. Used Car Values: Determine the estimated used car retail value of the car you plan on purchasing.
A simple internet search will turn up plenty of free online calculators to help you determine the values.
Deducting Auto Expenses
Standard Mileage Rate Method: The standard mileage rate takes into account the current average cost of fuel, oil, insurance, repair, maintenance, and depreciation expenses. Business-related parking and toll expenses are also deductible.
Caution: If you don’t use the standard mileage rate for the first year the vehicle is placed in service, you will not be able to use it in future years.
Actual Expenses Method: First, determine the entire actual cost of operating the vehicle (including parking fees and tolls) for the past year. Next, calculate what portion of this cost is attributable to business use of the vehicle.
Both methods may include interest paid on the car loan for deducted on business returns. However, this deduction is not permitted for employees deducting job connected car expenses as part of their itemized deductions.
Depreciation Limits on Luxury Vehicles
If you deduct actual expenses for the business use of your car, you may find that your write-offs for depreciation end up restricted due to Luxury Car Limitations. You might be surprised to know that most vehicles (even trucks and SUVs) fit the legal definition of a Luxury Vehicle, regardless of their cost.
If your vehicle is four-wheeled, used mostly on public roads, and has an unloaded gross weight of no more than 6,000 pounds, it is legally considered a Luxury Vehicle.
Congress has placed a limit of $25,000 on the Section 179 deduction for certain vehicles in an effort to minimize the practice of purchasing SUVs as a tax shelter. The limit applies to SUVs with a gross weight of 14,000 pounds or less. There are a few exemptions, however. A vehicle may be exempt if:
– It is designed for more than nine individuals in seating rearward of the driver’s seat
– It is equipped with an open cargo area of at least six feet in interior length
– It has an integral enclosure which fully encloses the driver’s compartment and load carrying device
– It does not have seating rearward of the driver’s seat
– It does not have a body section protruding more than 30 inches ahead of the leading edge of the windshield
Regulations may change from year to year, so be sure to talk with one of our professionals before you purchase a vehicle that you hope to deduct expenses from.
Deducting Interest on Vehicle Loans
Will the Interest on Your Vehicle Loan be Deductible?
The answer to that question depends on:
1. Whether or not the vehicle is being used for business purposes
This is a simple question to answer. You may use a vehicle partly or wholly for business purposes, as a self-employed individual or an employee. If you use the vehicle entirely for personal use, none of the interest will be deductible.
2. Where the expenses are being deducted
If the vehicle is used partly for business and the expenses are being deducted on your self-employed business schedule, you may deduct the business portion of the interest as business interest. The personal portion of your interest will be non-deductible.
If you use the vehicle partly for business as an employee and the expenses are being deducted as an itemized deduction, none of the interest will be deductible.
Purchased or Leased
The qualified vehicle may be either purchased or leased by the taxpayer (but not for resale) to qualify for either credit; and, the original use of the vehicle must have begun with the taxpayer.
Since technology is constantly changing and electric vehicles are evolving, the regulations and credits surrounding them in the tax code may vary from year to year. Please call us to make sure you understand the latest changes related to these tax breaks.
If you use a vehicle for business purposes, you are allowed to deduct the business portion of the operating expenses on your business return, even if you use the car for both business and personal purposes. There are two methods for determining the portion of expenses used for business purposes: the standard mileage rate method, and the actual expense method.
Donating Your Vehicle
You will also need to obtain a written statement from the charity containing the name of the donor, their tax ID number, and the VIN number. You can file Form 1098-C which includes all of the required acknowledgement elements for the donee to complete and attach a copy of this form to your federal tax return when claiming a deduction for contribution of a vehicle, boat, or airplane.
There is an exception to these rules if the charity retains your donated vehicle for their own use “to substantially further the organization’s regularly conducted activities” or sells it (or gives it away) at a price significantly below FMV to a needy individual in direct furtherance of the charitable purpose of a donee of relieving the poor and distressed or the underprivileged who are in need of a means of transportation.
Congress has enacted stringent requirements that significantly limit the deduction you can claim for this charitable donation. Many charities immediately resell donated vehicles to wholesaler at prices far less than the Fair Market Value of the vehicle. If your deduction exceeds $500, it will be limited to the gross proceeds from the charity’s sale of the vehicle.
Tax Breaks for Qualified Plug-in Electric Vehicles
There are two credits for qualified plug-in electric vehicles that can offer taxpayers great benefit. The first provides credit for the purchase of electric cars. The second provides credit for low-speed and two- or three-wheeled vehicles. It is possible that some vehicles may actually qualify for both credits, but the IRS allows taxpayers to apply only one credit to any single vehicle.
Four-Wheeled Electric Vehicle Credit: Qualified plug-in electric drive motor vehicles placed in service in 2010 and later qualify for a credit of $2,500 plus $417 if the battery capacity is more than 5 kilowatt hours and an additional $417 for every kilowatt hour of traction battery capacity over 5.
Low-Speed, Motorcycle & Three-Wheeled Vehicle Credit: This credit is equal to 10% of the cost of the vehicle with a maximum credit $2,500 per vehicle.