Tuesday, January 30, 2007

Deductibility Of A New Truck Or Car

June --
I bought a new truck for my construction business and I would like to know if I can deduct my monthly payment? Or can I only deduct the interest I paid and deduct the mileage I traveled.
-- Andy


There are two ways to calculate vehicle expenses:

Mileage Method: You get to deduct business mileage as cents per mile. In 2006 it's 44 1/2 cents per mile. You may also deduct the business portion of finance charges on your auto/truck loan. For instance, if you put 10,000 miles on your vehicle per year, and 2,500 are for business, you may deduct 25% of your vehicle loan interest.

Actual Expense: Tally all expenses for your vehicle for the year and deduct the business portion of those expenses. Expenses include gas, repairs, tires, insurance, etc., and loan interest but not the monthly payment. If you use your truck only for business, then you get to deduct all the expenses, but still cannot deduct the monthly payment.

Whether you bought your truck with cash or are paying for it with a loan, you deduct the cost of the vehicle over a period of time. That's called depreciation. There are different methods for depreciating your vehicle depending upon portion of business use, and class of vehicle.

And, as always, read the book that can simplify your tax and financial life, AND save you money!

SELF-EMPLOYED TAX SOLUTIONS .

7 comments:

Diana said...

I am wondering whether there are any tax advantages to leasing, rather than purchasing, a new vehicle. I need a new vehicle and am looking at the best way to do this. I would use the vehicle to transport work-related items, and to travel between my home office and my rented office, and between those and my bookkeeper's office. My understanding was that if the vehicle is leased, one could deduct the whole amount of the lease payment, but if the car is purchased, then only mileage cost (and loan interest, as discussed above) could be deducted. I'm confused. :)

June Walker said...

If your business requires you to wow clients with glitter, a new car every year is imperative, and leasing is the better way to go. Leasing versus owning, however, is generally based on how good a deal you can get, with tax consequences secondary.

If you lease you may write off the business portion of all vehicle expenses -- as listed above in the "actual expense" method -- including the business portion of the lease payment.

If you purchase a vehicle you may deduct the business portion of all expenses. Even if you still owe money on the auto loan, you may also deduct the cost of the car over a period of years -- up to $2,960 in the first year depending on the portion of business use. You may deduct more of the cost in the first year for other types of vehicles.

countrylife said...

What if the car you have wrote off for business, ends up with the second year having more personal miles logged than business miles??

June Walker said...

Dear Countrylife,

When the actual expense method is used to deduct auto expense the depreciation of the auto is adjusted each year depending on % of business use.

-- June

PattieS said...

Can the % business use be calculated based on time used, other than mileage? I am an independent advertising sales rep and need a nice car to take clients to lunch. When I do lunch, the car is being used appr. 3 hours (over a third of my business day). But since the client is nearby, the actual mileage used is only 5%, as I use this car on weekends for family trips.

June Walker said...

Pattie S --

Business use of car must be calculated based on how many miles are for business driving vs how many miles are for personal use.

Think of it this way: the cost of running your car -- gas, repairs, new tires -- is based on how much the car is used not how long it sits in a parking lot or in your garage.

-- June

June Walker said...

PS to Pattie S

I like your creative thinking!