Since we went over the basics of the income you should record and expenses you can deduct on your Schedule C, now we get to discuss an important and prevalent topic among business owners. You can expense certain costs associated with using your vehicle for business purposes and there are two methods for recording these expenses. The method we will go over now is the Actual Expense method.
The Actual Expense method means that you can deduct the actual expenses you incurred for your vehicle. If you used your vehicle solely for business and never for personal reasons, you can use 100% of expenses such as oil, registration, repairs, etc. on your Schedule C. However, it is often the case that people use their vehicle for personal and business purposes. In this situation, you should keep track of the miles you drove solely for business and the total miles you drove during the year. Then you can calculate the percentage of business use for your car. You would then multiply this percentage by those oil, registration, and other expenses to get the amount that you are allowed to expense.
You can also deduct depreciation expense on your Schedule C using a variety of methods. They consist of the following:
Section 179 deduction: When you place a vehicle in service, you can deduct a large portion of the basis of that vehicle as depreciation in the year you place it in service. You also must use the vehicle for at least 50% business use to claim the 179 deduction. You must calculate the basis of your vehicle which is usually the purchase price for most people. (If you need help calculating your basis, leave a comment below, and I can help you out!) If you have a sport or utility vehicle, your basis is limited to $25,000. This means that $90,000 sports car you just bought can’t give you as big of a deduction as you think. Additionally, if you use your vehicle for a percentage of the time for business use, say 80%, then you must multiply your basis by 80% to figure the amount of basis you can actually use for your business depreciation deduction.
Once you’ve figured your basis, then you can determine your deduction. If your vehicle is qualified property and you are taking the Special Deprecation Allowance (see below), then your limit for a depreciation deduction during 2014 is $11,160. If you don’t plan on taking the Special Depreciation Allowance, then your deduction limit drops to $3,160. Here is an example from the IRS website to simplify things:
“On September 4, 2014, Jack bought a used car for $10,000 and placed it in service. He used it 80% for his business, and he chooses to take a section 179 deduction for the car. The car is not qualified property for purposes of the special depreciation allowance.
Before applying the limit, Jack figures his maximum section 179 deduction to be $8,000. This is the cost of his qualifying property (up to the maximum $500,000 amount) multiplied by his business use ($10,000 × 80%).
Jack then figures that his section 179 deduction for 2014 is limited to $2,528 (80% of $3,160). He then figures his unadjusted basis of $5,472 (($10,000 × 80%) − $2,528) for determining his depreciation deduction. Jack has reached his maximum depreciation deduction for 2014. For 2015, Jack will use his unadjusted basis of $5,472 to figure his depreciation deduction.”
Special Depreciation Allowance: The Special Depreciation Allowance means that you can deduct an additional 50% of the vehicle’s depreciable basis. The first thing to determine is whether or not your vehicle is qualified property for the purposes of this allowance. To be qualified property, it must meet the following three criteria: be purchased on or after January 1, 2008, it must be used at least 50% for business purposes, and it must have been placed in service before January 1, 2008. You would take this allowance after claiming any Section 179 Expense, but before taking any depreciation deduction (see below). You can elect not to use this allowance by attaching a statement to your tax return stating the type of property and the fact that you are electing not to take it. However, if you do not elect out of the allowance, you still must decrease the basis of your vehicle by the amount of the deduction that you would have gotten, even if you did not use the allowance.
Depreciation Deduction: Lastly, after you’ve taken into account your Section 179 Deduction and your Special Depreciation Allowance, you can calculate your remaining depreciation expense. Remember that if you take Section 179 and Special Depreciation Allowance, your depreciation for that year is limited to $11, 160 or $3,160 if you choose not to take the Special Depreciation Allowance. There are a few options you can use to calculate your annual depreciation deduction. While you may only be able to take the other two deductions in the year the vehicle was placed in service, you can still get a depreciation deduction every year until the basis of the vehicle has been fully depreciated. Most people will use MACRS depreciation which stands for Modified Accelerated Cost Recovery System. Under this system, cars are given a useful life of 5 years. MACRS depreciation offers a variety of different ways in itself to depreciate your vehicle so click here to check out the IRS website and go more in-depth to makers. Generally, you will get larger deductions in the earlier years of your vehicles life using MACRS depreciation.
You cannot use MACRS if you were first using Standard Mileage Method, which we’ll discuss later, instead of Actual Expense Method. In this case, you would be required to use straight line depreciation which means you get an equal amount of depreciation expense over the 5 years of the vehicles useful life. Straight line is a much simpler depreciation concept, but is not as beneficial in the earlier years as MACRS is.
Depreciation can be a very confusing issue, especially when trying to apply it to your business assets. If you have any questions or comments, please leave them below, and I will do my best to help you out! Stay tuned to The Tax Bleep to learn about the alternative method, Standard Mileage Method, for expensing costs associated with your business vehicle!