Cars are one of the most expensive items to own, both in terms of the initial investment we make in them and in the cost of ongoing maintenance. Fortunately, there are valid ways to offset these expenses with tax deductions. You might qualify for one or more of these options for personal, small business, self-employed, or business deductions.
- If you own a business or work for yourself, you may recognize that owning and operating a car for work purposes can become a large expense.
- The IRS allows certain car expenses used for qualified business purposes to be written off on one's tax returns.
- There are several deductions and ways to include car costs as a business expense, including donating an old car to charity, logging business miles traveled, and adding vehicles to a company fleet, among others.
1. Charitable Contributions
If your old car isn't going to make it much longer, and the cost of repair isn't worth the investment, consider donating it to charity rather than trying to make a little money selling it used. You'll save the hassle of putting up an ad and dealing with potential buyers who want to talk you down from your price. And if you know your car isn't worth a whole lot, you may be better off donating it, which will give you a deduction for the market value the car still has.
Many charitable organizations will even pick up your donated car for you. This method of tax deduction can apply to personal or business applications, just make sure you get an official receipt from the charity, which should include the value of the vehicle you donated.
2. Electric or Hybrid Cars
The IRS provides credit for plug-in electric drive motor vehicles for vehicles acquired after Dec. 31, 2009. Depending on the details, the credit can be as high as $7,500.
The credit applies to the manufacturer and phases out once 200,000 qualifying vehicles of that manufacturer have been used in the U.S. If your electric or hybrid car was purchased after Dec. 31, 2009, you may qualify for a credit.
3. Convert Your Car
Keeping your current car but wanting to reduce emissions? Look into an electric drive conversion kit, which you can hire a professional mechanic to install onto your car.
Before you purchase the kit, get a mechanic's opinion on whether your car is worth converting; in some cases, such as on older cars that don't have much life left in them, the cost of conversion may be an investment not worth making. But if you have a newer car with a lot of life left in it, converting can save you on fuel costs.
4. Deduct Business Use
If you are a freelancer and otherwise self-employed individual, you can deduct the cost of business use, even if it's on your personal vehicle. This is the best method for those who work under a sole proprietorship rather than as a legal business structure such as a corporation. The key here is to separate business use from personal use.
If you are using your car for self-employment business expenses, it is generally recommended to track your mileage and keep receipts to help distinguish between personal use and tax-deductible business use.
5. Small Business Fleet Deductions
If you're running a small business, a vehicle used exclusively for business can add to your yearly tax deductions as part of your operating expenses. While the cost of overhauling a business vehicle doesn't qualify as a deduction (overhauling must be included in capitalization cost and calculated in the depreciation cost), the cost of repair can be deducted. Keep clear records of repairs, because just claiming an estimated cost won't go over well with the IRS.
6. Unreimbursed Business Expenses
If you're employed by a company and have used your own personal vehicle for business-related purposes, you can claim those expenses on your tax deduction if your company has not reimbursed you.
These expenses could include fuel costs and maintenance and are usually best calculated by using a per-mile cost, which the IRS updates on a regular basis. As with self-employed tax deductions, the key is to keep clear records and differentiate between business use and personal use.
The Bottom Line
Unless you're using your car exclusively for your business, you can't deduct the full cost of purchasing, maintaining, and repairing it. You can and should, however, deduct what you can. The key, as with almost any issue to do with the IRS, is having clear records to support your claims.