Most business owners are aware of depreciation for equipment and the significant role it plays in minimizing tax liability. However, did you know that the same tax breaks are available by purchasing personal and business vehicles through your company? Learn about the tax benefits of a vehicle purchase for your business and a few money-saving tips.
Next to housing, vehicles claim a large chunk of your disposable income. In fact, many individuals will buy a car before they buy a home. According to a study conducted by Experian Automotive, Americans currently own an average of 2.28 vehicles per household with more than 35 percent of households owning three or more vehicles. On average, we purchase eight vehicles over our lifetime between the ages of 23 and 70.
Think about the money spent over your lifetime on cars including maintenance, gas, insurance, registration, tags and deductibles paid after accidents. As a wealth builder, you must realize all of that money—every single penny—spent on a vehicle will not build wealth. Your vehicle is a depreciating asset that loses value the moment it is retitled to you.
Before we get into the tax breaks on purchasing a vehicle through your business, we have the following money-saving tips to help you think about your next vehicle transaction:
Purchase a Used Vehicle: Do as the millionaires do and purchase a used vehicle! They have done the numbers and know that a vehicle does not build wealth. The best play is to buy used and let someone else take the hit on the depreciation. The models don’t change that much from year to year and in most cases a three-year-old vehicle looks like new. Consider a certified pre-owned vehicle that is relatively new, low mileage that have been inspected thoroughly and certified by dealers representing the automaker that built them. They come with warranty coverage and other extras you wouldn’t get if you bought a non-certified used car. Buying a certified pre-owned vehicle can save you a tremendous amount of money compared to new.
Know Your Credit Score: Before shopping for a vehicle loan, it’s important to know your credit score. It will also give you time to correct any misinformation on the credit report and allow you to shop for loans with a better idea of the rates in which you are qualified. You’re entitled to a copy of your credit report from each of the three major companies—Experian, TransUnion and Equifax—once per year. To receive your actual credit score, you’ll need to request that with the credit report and pay a fee. The target score is 740.
Secure Financing Before You Visit the Dealer: We recommend keeping your loan longevity no more than 60 months. If you have to go longer, establish a snowball plan to pay the loan off early. Be sure the contract allows you to pre-pay or refinance at any time. Securing a pre-approved loan from a bank before you visit the dealership gives you a powerful negotiating tool. Automakers want your financing business too, so if you have a pre-approved loan, dealers will often beat (or at least match) those terms. However, be aware of additional fees.
Now, onto the heart of the matter. The IRS issued guidance on deducting expenses under Section 179(a) and on deducting depreciation under Section 168(g). These rules, as amended by the Tax Cuts and Jobs Act in December 2017, allows taxpayers to deduct the cost of personal property such as machinery and equipment purchased for use in a trade or business—including vehicles!
You may elect to recover all or part of the cost of a car that is qualifying Section 179 property, up to a limit, by deducting it in the year you place the property in service. For this purpose, a car is placed in service when it is ready and available for a specifically assigned use in a trade or business. Even if you aren’t using the property, it is in service when it is ready and available for its specifically assigned use for your business.
The maximum amount you can elect to deduct for most Section 179 property (including cars, trucks, and vans) you placed in service in tax years beginning in 2022 is $1,080,000. This limit is reduced by the amount by which the cost of Section 179 property placed in service during the tax year exceeds $2,700,000.
Generally, the cost of a car, plus sales tax and improvements, is a capital expense. Because the benefits last longer than one year, you generally can’t deduct a capital expense. However, you can recover this cost through the Section 179 deduction, special depreciation allowance, and depreciation deductions. Depreciation allows you to recover the cost over more than one year by deducting part of it each year.
Consider these tax benefits when you purchase a vehicle through your business:
- The first-year limit on the depreciation deduction, special depreciation allowance, and Section 179 deduction for vehicles acquired before September 28, 2017, and placed in service during 2022, is $11,200.
- The first-year limit on depreciation, special depreciation allowance, and Section 179 deduction for vehicles acquired after September 27, 2017, and placed in service during 2022 increases to $19,200.
- The maximum Section 179 expense deduction for sport utility vehicles placed in service in tax years beginning in 2022 is $27,000.
- Looking ahead, the Inflation Reduction Act issued in August 2022 incentivizes Americans to buy electric cars, trucks and other vehicles. Business owners can get a tax credit for new electric vehicles purchased on or after January 1, 2023. Vehicles that weigh less than 14,000 pounds qualify for up to $7,500 and those that weigh more than that qualify for up to $40,000.
You may also be able to deduct your actual car expenses (make sure to keep all receipts) such as depreciation, licenses, gas, oil, tolls, lease payments, insurance, garage rent, parking fees, registration fees, repairs and tires. The standard mileage rate in 2022 for the cost of operating your car for business use is 58.5 cents per mile from January 1 – June 30 and 62.5 cents per mile from July 1 – December 31.
For more details on vehicle deductions and tax guidance, please see IRS Publication 463 on Travel, Gift and Car Expenses.
Last month, we asked you “What is the Difference in Net Income and Total Equity?” The responses in the poll were amazing in that 85 percent of respondents were spot on and answered the question correctly! This means that you know your business. For those who need a refresher: Net Income = Net Sales – Cost of Goods Sold – Administrative Expenses – Income Tax Expense. Total Equity = Assets – Liabilities.
We invite you to take part in this month’s poll. “Have You Purchased a Personal Vehicle through Your Company?” Scan the QR code with your mobile device or click on the link below to participate in this month’s poll. The results will be revealed in the next column. See you next month! https://www.surveymonkey.com/r/92WCR9T,