Many businesses rely on company vehicles, so employees can go out and meet with clients, partners, and other individuals. However, when you are self-employed, you likely just use your regular car for such actions.
If you are thinking of buying a company car when self-employed, then you should be aware there are significant tax deductions you can take advantage of. These deductions may influence the type of vehicle you want to purchase. Thus, it is paramount to inform yourself before making such a big investment.
What vehicles qualify?
To begin, there are certain occupations that may not be able to deduct the value of the vehicle toward business expenses. This includes vehicles used for hire, such as airport transport vans and taxi cabs. That means if you are a self-employed taxi driver in your city, then there are no deductions for the overall value of the car. The same rule applies to vehicles you use as equipment, which would be the case for dump trucks.
There are also limitations on vehicles Congress defines as “luxury cars.” However, this does not necessarily correlate to a Rolls Royce. Congress actually has a modest view of cars considered “luxury.” For a standard new car, the maximum first-year write-off you have for is $3,160. You can also take advantage of bonus depreciation up to $8,000.
How do travel nurses get paid?
Anyone who is self-employed should be intricately familiar with 1099 forms. Standard employers send out W-2 forms to keep track of employee payroll. As an independent contractor, you will receive a 1099 form. For this reason, you are allowed to deduct anything that aids in your job. For certain professions, that can certainly include the purchase of a new vehicle as long as you use it for business a majority of the time.
Self-employed individuals also need to send in Schedule C with their federal taxes. This form allows you to report all expenses and income. For expenses related to a company car, you can report it on Line 9, and it will get combined with the rest of your expenses on Line 28. There are many expenses you can deduct related to your vehicle, including gas, insurance, repairs, tolls, and mileage. It can also include any decals you place on your vehicle to advertise your business.
However, independent contractors need to keep in mind how much of their vehicles use is actually spend on the business. Typically, a self-employed individual uses their car as a family vehicle and for personal errands and activities. You need to keep track of how much of the car goes toward the business. In the event you only use your car 70 percent of the time for your business, only 70 percent of the expenses are deductible.
What can you write off in terms of mileage?
As of 2018, the Internal Revenue Service allows self-employed workers and regular employees to use the standard mileage rate when determining deductions. That comes out to 54.5 cents for every mile. To determine the total mileage for your business vehicle, you need to figure out the total number of miles you drove for the entire year and the total number of miles you drove only for business-related purposes.
There are certain times when you drive your vehicle that will not go toward mileage deductions. For instance, if you drive to an office building to work, then you cannot write off the gas you use for the commute.
Additionally, personal side trips between business stops don’t count. If you are driving around for business but decide to stop at the grocery store before you head back home for the day, then you cannot write off the mileage from the store to your house.
How do you determine the depreciation of your company car?
Buying a company car for an LLC can be a great investment. Moreover, it is one you can continue to benefit from for many years to come. The years after you purchase your vehicle, you can deduct the general wear and tear the car experiences in addition to the regular car expenses.
No matter how long you plan on using your company car for, you need to keep detailed records. That is why many self-employed individuals enjoy using MileIQ. This mileage tracking app automatically logs the number of miles you drive for business-related activities. You can receive a detailed report in the event you need to submit something more substantial to the IRS.
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MileIQ’s blog does not constitute professional tax advice. You should contact your own tax professional to discuss your situation.