The new car and truck models 2022 will soon be on display in the dealers' showrooms. If you are looking for a vehicle for your self-employment, don't forget to include taxes.
Starting point: Basically, as a self-employed taxpayer, you can deduct car expenses, but there are a few twists and turns along the way. In particular, the tax law contains several "speed limits" that can affect your depreciation.
First of all, there are two ways to deduct vehicle costs.
1. Actual Spend Method: This method allows you to subtract your actual expenses based on the percentage of business usage. For example, if you use a car 90% for business and 10% personally drive it, you can write off 90% of your qualified expenses, including gasoline, oil, insurance, repairs, and so on. In addition, the write-off has the prospect of deductions, subject to certain Limits (more on that later).
2. Standard Mileage Rate: Alternatively, you can use the simplified standard mileage rate set annually by the IRS. For 2021, the standard kilometer rate is 56 cents per business mile (compared to 57.5 cents in 2020), plus business-related tolls and parking fees. For example, if you drive a vehicle that has 10,000 business miles and you pay $ 500 in parking and tolls this year, your deduction is $ 6,100 (56 cents x 10,000 + $ 500).
Whichever method you use, keep detailed concurrent records as evidence in the event the IRS challenges your deductions. In particular, you need to record every business trip with the date, location, distance and business purpose. However, accounting for the actual cost method is even more complex, as you have to settle every deductible expense.
Often times you will find that the actual cost method produces a larger annual deduction, which justifies the effort. In particular, the rules related to depreciation allowances can give you a tax increase. However, to discourage taxpayers from claiming excessive deductions, the tax law sets “luxury car” limits that actually apply to moderately priced vehicles
Consider these two crucial tax breaks for buying business vehicles:
- You can claim a power deduction according to § 179 up to the annual upper limit for luxury cars. Example: For a car entering service in 2021, the limit is $ 10,200. Then you are entitled to a deduction in the following years according to the cost recovery tables.
- You can claim an initial annual bonus depreciation allowance. Currently, the maximum deduction for a car is $ 8,000.
Note that the actual deduction amounts are based on the percentage of business usage. Going back to our previous example, if you are eligible for a maximum Section 179 allowance of $ 10,000 for a car and 90% of that car is used for business, your deduction will be $ 9,000.
Similar rules apply if you lease a car instead of buying it. In any case, a self-employed taxpayer stands for generous write-offs.
And that's just the tip of the iceberg. Other special rules can come into play. For example, if you buy a heavy SUV instead of a passenger car, you may be eligible for a deduction of up to $ 25,000. You can also take advantage of a special electric car tax credit of up to $ 7,500. You can find out more from your tax advisor.
Finish line: The tax aspects can be critical in this area. Before buying a car, familiarize yourself with all of the rules.