Make the Most of Your Mobility–Related Tax Breaks

Monday, December 27, 2021

By Susan Kaplan

The new 2022 car and truck models will be in dealership showrooms soon. If you’re in the market for a vehicle for your self-employed business, don’t forget to factor taxes into the equation. You may deduct vehicle expenses in one of two ways.

  1. Actual expense method, which allows you to deduct your actual expenses based on the percentage of business use, and you ‘re in line for depreciation deductions, (subject to certain limits).
  2. Standard mileage rate, which for 2021 is 56 cents per business mile, plus you can add on business-related tolls and parking fees.

Regardless of which method you use, keep detailed contemporaneous records as proof in case the IRS challenges your deductions. Notably, you must record each business trip, including the date, location, distance and business purpose. But the record keeping for the actual expense method is even more burdensome because you must account for every deductible expense.

Often the actual expense method will produce a bigger annual deduction, and justify the hassle. You may get a tax boost from the rules associated with depreciation deductions. However, to deter excessive deductions, the tax law imposes “luxury car” limits, which actually kick in for moderately-priced vehicles

There are two critical tax breaks available for business vehicle purchases:

  • You can claim a current deduction under Section 179 up to the annual luxury car limits. Example: For a passenger car placed in service in 2020, the limit was $10,100. (The 2021 limits will be announced shortly.) Then you are entitled to a deduction in succeeding years under cost recovery tables.
  • You can claim a first-year bonus depreciation deduction. Currently, the maximum deduction for a passenger vehicle is $8,000.
  • The actual deduction amounts are based on the percentage of business use. If you’re entitled to a $10,000 maximum Section 179 deduction for a car and you use it 90% for business, your deduction is $9,000.
  • Comparable rules apply if you lease a car instead of buying it. In either event, a self-employed taxpayer is in line for generous write-offs.

CONTACT US: This just the tip of the iceberg on Tax Deductions for Self-Employed Business Vehicles. The tax aspects can be critical in this area. Make sure you understand all the rules before you go car shopping. Generally, you can claim deductions for vehicle expenses as a self-employed taxpayer, but other special rules may come into play. For instance, if you buy a heavy duty SUV instead of a passenger vehicle, you may qualify for a deduction of up to $25,000. Also, you might benefit from a special tax credit for electric cars of up to $7,500.