CHAPTER 9
Car and Truck Expenses
Americans are highly mobile, and the car is the method of choice for transportation. If you use your car for business, you may write off various costs. The IRS reported that on 2014 returns (the most recent year for statistics), car and truck expenses were the largest category of deductions for sole proprietors (only the cost of goods sold, which is not relevant to service businesses and in any event is not a separate deduction category, was larger). In order to nail down deductions for these expenses, you must carefully observe certain recordkeeping rules. There are 2 methods for deducting costs: the actual expense method and the standard mileage allowance. In order to use either method, you must maintain proper records for business driving.
For further information about deductions with respect to business use of your car, see IRS Publication 463, Travel, Entertainment, Gift, and Car Expenses.
Deducting Car and Truck Expenses in General
The discussion in this chapter usually refers to cars used partly or entirely for business. Many of the rules also apply to trucks and vans.
The law allows you to choose between two methods for deducting business-related expenses of a car: the actual expense method or the standard mileage allowance fixed by the IRS, both of which are detailed in this chapter.
Choosing Between the Actual Expense Method and the Standard Mileage Allowance
Read over the rules on the actual expense method and the standard mileage allowance. For the most part, the choice of method is yours. The choice applies whether you own or lease the car. In some cases, however, you may not be able to use the standard mileage rate. Where you are not barred from using the standard mileage rate and can choose between the methods, which is better? Obviously, it is the one that produces the greater deduction. However, there is no easy way to determine which method will produce the greater deduction. Many factors will affect your decision, including the number of miles you drive each year and the extent of your actual expenses. See the example's comparison.
In making your decision, bear in mind that the standard mileage allowance simplifies recordkeeping for business use of the car.
You should make the decision in the first year you own the car. This is because a choice of the actual expense method for the first year will forever bar the use of the standard mileage allowance in subsequent years. If you use the standard mileage rate, you can still use the actual expense method in later years. However, if the car has not yet been fully depreciated (using the deemed depreciation rates discussed later), then, for depreciation purposes, you must use the straight-line method over what you estimate to be the car's remaining useful life.
Actual Expense Method
The actual expense method allows you to deduct all of your out-of-pocket costs for operating your car for business, plus an allowance for depreciation if you own the car. Actual expenses include:
| Car washes | Lease fees | Repairs |
| Depreciation | Licenses | Tires |
| Garage rent | Loan interest | Tolls |
| Gas | Oil | Towing |
| Insurance | Parking fees | Vehicle registration fees |
For individuals, whether interest on a car loan is deductible depends on employment status. If you are an employee who uses a car for business, you cannot deduct interest on a car loan; the interest is treated as nondeductible personal interest. However, if you are self-employed, the interest may be treated as business interest. For corporations, interest on a car loan is fully deductible.
If you pay personal property tax on a car used for business, the tax is deductible by an employee only as an itemized deduction. Personal property tax is not grouped with other car expenses. Instead, it is listed on an individual's Schedule A as a personal property tax.
If your car is damaged, destroyed, or stolen, the part of the loss not covered by insurance may be deductible. If the car was used entirely for business, the loss is treated as a fully deductible casualty or theft loss. If it was used partly for personal purposes, the loss may be treated as a casualty or theft loss, but the portion of the loss allocated to personal purposes is subject to certain limitations. See Chapter 17 for a discussion of casualty and theft losses.
Not all car-related expenses are deductible. Luxury and sales taxes cannot be separately deducted even if a car is used entirely for business; these taxes are treated as part of the cost of the car and are added to the basis of the car for purposes of calculating depreciation, as well as gain or loss on the future sale of the car.
Fines for traffic violations, including parking violations, are not deductible, even when they were incurred in the course of business-related travel.
Depreciation
If you own your car and use it for business, you may recoup part of the cost of the car through a deduction called depreciation. The amount of depreciation depends on a great many factors. First, it depends on whether you use the depreciation allowance or claim a Section 179 deduction (discussed later in this chapter). It also varies according to the year in which you begin to use your car for business, the cost of the car, and the amount of business mileage for the year as compared with the total mileage for the year. Depreciation is covered in Chapter 14 as well.
Business Use versus Personal or Investment Use
Whether you claim a depreciation allowance or a Section 179 deduction, you can do so only with respect to the portion of the car used for business. For example, if you use your car 75% for business and 25% for personal purposes, you must allocate the cost of the car for purposes of calculating depreciation. The allocation is based on the number of miles driven for business compared to the total number of miles driven for the year.
If you use a car for investment purposes, you can add the miles driven for investment purposes when making an allocation for depreciation.
Depreciation Allowance
A depreciation allowance is simply a deduction calculated by applying a percentage to the basis of the car. Cars are treated as 5-year property under the Modified Accelerated Cost Recovery System (MACRS), the depreciation system currently in effect, as discussed in Chapter 14. As such, you would think that the cost of the car could be recovered through depreciation deductions over a period of 5 years. However, this is generally not the case because of a number of different rules that exist. These rules all operate to limit the amount of depreciation that can be claimed in any one year and to extend the number of years for claiming depreciation.
Depreciation can take several forms. There is accelerated depreciation under MACRS, which results in greater deductions in the early years of ownership and smaller deductions in the later years. There is straight-line depreciation, which spreads depreciation deductions evenly over the years the car is expected to last (the fixed number of years may, in fact, have no relation to the actual number of years the car is in operation). Tables 9.1 and 9.2 provide the percentage for depreciation under both methods. There is the first-year expense deduction, discussed later in this chapter, which is in lieu of depreciation. It takes the place of depreciation for the first year. Any part of the car not recovered through the first-year expense deduction can then be recovered through depreciation deductions in subsequent years.
| Year | Rate (Percent) |
|---|---|
| 1 | 10 |
| 2 | 20 |
| 3 | 20 |
| 4 | 20 |
| 5 | 20 |
| 6 | 10 |
*Depreciation may not exceed a dollar limit (see page 226).
Business Use
In order for you to claim an accelerated depreciation deduction or a first-year expense, the car must be used more than 50% for business. Compare the miles driven during the year for business with the total miles driven. If more than 50% of the mileage represents business use, accelerated depreciation (or the first-year expense deduction below) can be claimed.
If you satisfy the 50% test, you may also add to business mileage any miles driven for investment purposes when calculating the depreciation deduction. You may not add investment mileage in order to determine whether you meet the 50% test. If you fail the 50% test (you use the car 50% or less for business), you can deduct depreciation using only the straight-line method. Your deduction is limited to the rates listed in the section on “Conventions.”
What if the percentage of business use changes from year to year? You may use your car 75% for business in one year but only 40% the next. Where business use in the year the car is placed in service is more than 50% but drops below 50% in a subsequent year, you must also change depreciation rates. Once business use drops to 50% or below, you can use only the straight-line method thereafter. The depreciation rate is taken from the table for the straight-line method (Table 9.1) as if the car had not qualified for accelerated depreciation in a prior year.
Where business use drops to 50% or less, you may have to include in income an amount called excess depreciation. This is the amount of depreciation (including the first-year expense deduction) claimed when the car was used more than 50% for business over the amount of depreciation that would have been allowable had the car not been used more than 50% in the year it was placed in service. In addition to including excess depreciation in income, you must increase the basis of your car by the same amount.
Conventions
There are special rules that operate to limit write-offs for depreciation, called conventions. Two conventions apply to depreciation for cars: the half-year convention and the mid-quarter convention.
The half-year convention, in effect, assumes that the car was placed in service in the second half of the year. Thus, in the first year you are allowed to claim only one-half the normal rate of depreciation, regardless of when in the year the car was placed in service. Thus, even if the car was placed in service on January 1, the half-year convention must still be used.
You can see in Table 9.1 how the half-year convention operates to limit depreciation in the first year. By the same token, the amount of depreciation denied in the first year will ultimately be allowed in the sixth year. Still, the half-year convention means that even though the car is classified as 5-year property, its cost will be recovered only over a period of 6 years. If the half-year convention applies to property used 50% or less for business, the depreciation rate is in Table 9.1. If the half-year convention applies to property used more than 50% for business, the depreciation rate is in Table 9.2.
The other convention, the mid-quarter convention, applies if more than 40% of all the depreciable property you place in service during the year is placed in service in the last quarter of the year.
If the mid-quarter convention applies to property used 50% or less for business, the rate is in Table 9.3.
| Year Placed in Service |
1st Quarter | 2nd Quarter | 3rd Quarter | 4th Quarter |
| 1 | 17.5% | 12.5% | 7.5% | 2.5% |
| 2 | 20.0 | 20.0 | 20.0 | 20.0 |
| 3 | 20.0 | 20.0 | 20.0 | 20.0 |
| 4 | 20.0 | 20.0 | 20.0 | 20.0 |
| 5 | 20.0 | 20.0 | 20.0 | 20.0 |
| 6 | 2.5 | 7.5 | 12.5 | 17.5 |
*Depreciation may not exceed a dollar limit (see page 226).
If the mid-quarter convention applies to property used more than 50% for business, the rate is in Table 9.4.
| Year Placed in Service |
1st Quarter | 2nd Quarter | 3rd Quarter | 4th Quarter |
| 1 | 35.00% | 25.00% | 15.00% | 5.00% |
| 2 | 26.00 | 30.00 | 34.00 | 38.00 |
| 3 | 15.60 | 18.00 | 20.40 | 22.80 |
| 4 | 11.01 | 11.37 | 12.24 | 13.68 |
| 5 | 11.01 | 11.37 | 11.30 | 10.94 |
| 6 | 1.38 | 4.26 | 7.06 | 9.58 |
*Depreciation may not exceed a dollar limit (see page 226).
Section 179 Deduction
The Section 179 deduction, also called the first-year expense allowance, is a one-time write-off for the cost of the car. The maximum amount of the Section 179 deduction in 2017 is $510,000. However, this may not be the limit that applies to the deduction for the purchase of a vehicle, because there are other limits that supersede this cap:
Dollar limits (discussed later) for the purchase of passenger vehicles, light trucks, and vans
A special limit of $25,000 for the purchase of heavy SUVs
Dollar Limit on Depreciation Deduction
The law sets a dollar limit on the amount of depreciation that can be claimed on a car used for business (see Table 9.5). The dollar limit is intended to limit depreciation that could be claimed on a nonluxury car. In essence, the government does not want to underwrite the cost of buying high-priced cars. However, in reality, the dollar limits do not really correlate with luxury cars, since the average cost of a new American car was more than $34,968 as of January 2017, according to Kelley Blue Book. Still, the dollar limits are a factor you must reckon with in calculating your deduction limit.
Table 9.5 Dollar Limit on Depreciation of Passenger Cars
| Date Car Placed in Service |
1st Year | 2nd Year | 3rd Year | 4th and Later Years |
| 2012 through 2017 | $11,160* | $5,100 | $3,050 | $1,875 |
| 2010 and 2011 | 11,060** | 4,900 | 2,950 | 1,775 |
*$3,160 if the car did not qualify for bonus depreciation (i.e., it was a used car).
**$3,060 if the car did not qualify for bonus depreciation (i.e., it was a used car).
The dollar limits in Table 9.5 do not apply to light trucks and vans (those weighing less than 6,000 pounds). Special (higher) limits apply as explained later in this chapter.
The dollar limit applies only to cars with a gross vehicle weight (the manufacturer's maximum weight rating when loaded to capacity) of 6,000 pounds or less. Most cars fall into this category.
Heavy SUVs
If you use an SUV as your business car, check the manufacturer's specifications to see if the weight exceeds 6,000 pounds (but not 14,000 pounds). If so, the dollar limits in Table 9.5 do not apply and the vehicle's cost can be expensed up to $25,000. In addition, bonus depreciation can be claimed if the vehicle is new, and regular depreciation can be claimed on the portion of the car that is not expensed.
If the dollar limit applies to your business car, the amount depends on the year in which the car was placed in service and how long you have owned it. Over the years, the dollar limits have been modified by law changes.
As a practical matter, most individuals will not get to fully depreciate their cars. They will have sold or traded them in long before the cost has been fully written off. This is because of the dollar limit. In the example on page 227, where a $20,000 car was placed in service in 2017, the car will not be fully depreciated until its ninth year (depending upon whether MACRS or the straight-line method was used).
These dollar amounts apply to cars used 100% for business. If you use your car for personal purposes as well as for business, you must allocate the dollar limit. The method for allocating this limit is the same method used for allocating the cost of the car for purposes of depreciation, as described earlier.
Increase Your Dollar Limit
The dollar limit applies on a per-car basis. If you own 2 cars and use each for business, you may be able to increase your total dollar limit. Be sure to apply the percentage of business use for each car to the applicable dollar limit.
Dispositions of a Car
When you sell your car, trade it in for a new one, or lose it as the result of a casualty or theft, you have to calculate your tax consequences.
Sale
If you sell your car, your gain or loss is the difference between what you receive for the car and your adjusted basis. Your adjusted basis is your original basis reduced by any first-year expensing or depreciation (up to the dollar limit each year). If the car has been fully depreciated, anything you receive for the car is all gain.
If you used the standard mileage allowance, you are considered to have claimed depreciation even though you did not have to figure a separate depreciation deduction. The standard mileage allowance automatically takes into account a deduction for depreciation. You figure your deemed depreciation according to the number of miles you drove the car for business each year and the years in which it was used (see Table 9.6).
Table 9.6 Deemed Depreciation
| Year | Rate per Mile |
| 2017 | 25¢ |
| 2015–2016 | 24 |
| 2014 | 22 |
| 2012–2013 | 23 |
| 2011 | 22 |
| 2010 | 23 |
If you use the actual expense method and sell the car before the end of its recovery period, you can claim a reduced depreciation deduction in the year of disposition. Calculate what the depreciation deduction would have been had you held the car for the full year. Then, if you originally placed your car in service during the first three-quarters of the year (January 1 through September 30), you can deduct 50% of the amount that would have been allowed. If you originally placed your car in service in the last quarter of the year (October 1 through December 31), you can deduct an amount calculated by applying the percentage in Table 9.7 to what would have been allowed.
Trade-In
The impact of trading in your old vehicle for a new one is discussed later in this chapter. You have two ways to handle the situation, and your choice impacts the amount of write-off for the new vehicle.
A special basis adjustment rule applies when you trade in a car used partially for business (see vehicle trade-in later in this chapter).
Casualty or Theft
If your car is damaged or stolen and insurance or other reimbursements exceed the adjusted basis of the car, you have a tax gain. However, if you use the reimbursements to buy another car for business or to repair the old car within 2 years of the end of the year of the casualty or theft, then no gain is recognized. The basis of the new car for purposes of depreciation is its cost less any gain that is not recognized.
Standard Mileage Allowance
Instead of keeping a record of all your expenses and having to calculate depreciation, you can use a standard mileage allowance fixed by the IRS to determine your deduction for business use of your car. You can use the standard mileage allowance in 2017 whether you own or lease the car. The standard mileage allowance takes the place of a deduction for gasoline, oil, insurance, maintenance and repairs, vehicle registration fees, and depreciation (if you own the car) or lease payments (if you lease the car). Towing charges for the car are separately deductible in addition to the standard mileage allowance. Parking fees and tolls, interest to purchase the vehicle, and personal property tax to register are also allowed in addition to the standard mileage allowance. Deductible parking fees include those incurred when visiting clients and customers or while traveling away from home on business. Fees to park your car at home or at your place of work are nondeductible personal expenses.
The standard mileage allowance for business use of a car in 2017 is 53.5¢ per mile. (Rural letter carriers who use their cars to deliver mail can deduct the amount paid to them by the U.S. Postal Service as an equipment maintenance allowance.) The IRS standard mileage rate can be adjusted annually for inflation. See Table 9.8 for mileage allowances based on the amount of driving.
Table 9.8 Sample Deductions Under the Standard Mileage Allowance for 2017
| Miles Driven | Deduction | Miles Driven | Deduction |
| 5,000 | $ 2,675 | 30,000 | $16,050 |
| 10,000 | 5,350 | 35,000 | 18,725 |
| 15,000 | 8,025 | 40,000 | 21,400 |
| 20,000 | 10,700 | 45,000 | 24,075 |
| 25,000 | 13,375 | 50,000 | 26,750 |
Standard Mileage Rate Barred
You cannot use the standard mileage rate when:
You operate more than 4 cars at the same time (such as in a fleet operation). This limit does not apply to the use of more than 4 cars on an alternate basis. For example, if you own cars and vans and alternate the use of these vehicles for business use, then you are not barred from using the standard mileage rate to account for the expenses of the business use for the vehicles.
You have already claimed MACRS or the first-year expense deduction on the car.
Standard Mileage Rate or Actual Expense Method?
As discussed earlier in this chapter, which method is preferable for you depends on a number of variables. The most important is the number of business miles you drive each year. As a rule of thumb, those who drive a great number of miles each year frequently find the standard mileage rate offers the greater deduction. However, the rate may not adequately reflect your actual driving costs. It is also important to note that the standard mileage rate is not dependent on the price of the car. Less expensive cars can claim the same deduction as more expensive cars, assuming each is driven the same number of business miles. Certainly, those with heavy SUVs can claim a greater deduction with the actual expense method.
Leasing a Car for Business
Leasing a business car is a popular alternative to buying one. If you use the car entirely for business, the cost of leasing is fully deductible. If you make advance payments, you must spread these payments over the entire lease period and deduct them accordingly. You cannot depreciate a car you lease, because depreciation applies only to property that is owned. However, you can choose to deduct the standard mileage rate in lieu of actual expenses (including lease payments).
Lease with an Option to Buy
When you have this arrangement, are you leasing or buying the car? The answer depends on:
The intent of the parties to the transaction.
If any equity results from the arrangement.
If any interest is paid.
If the fair market value of the car is less than the lease payment or option payment when the option to buy is exercised.
When the factors support a lease arrangement, the payments are deductible. If, however, the factors support a purchase agreement, the payments are not deductible.
Inclusion Amount
If the car price exceeds a certain amount and you deduct your actual costs (you do not use the standard mileage rate), you may have to include in income an inclusion amount (technically, you merely reduce the deduction for vehicle lease payments by the inclusion amount). This is because the law seeks to equate buying with leasing. Since there is a dollar limit on the amount of depreciation that can be claimed on a luxury car that is owned, the law also requires an amount to be included in income as an offset to high lease payments on a car that is leased. In essence, the inclusion amount seeks to limit your deduction for lease payments to what it would be if you owned the car and claimed depreciation. The inclusion amount, applies if a car is leased for more than 30 days and its value exceeds a certain amount. Amounts are adjusted annually for inflation. The inclusion amount is taken into account as long as you lease the car, but the amount taken into account each year is based on the year that the lease begins (i.e., you are unaffected by future inflation adjustments). If the capitalized cost of the car is specified in the lease agreement, that amount is considered to be the fair market value of the car. At the start of the lease, you can see what your inclusion amount will be for that year and for all subsequent years. The inclusion amount is based on a percentage of the fair market value of the car at the time the lease begins.
The inclusion amount applies only if the fair market value of the car when the lease began was more than $18,500 in 2011 and 2012, $19,000 in 2013, $18,500 in 2014, $17,500 in 2015, and $19,000 in 2016 and 2017.
Inclusion amounts in Table 9.9 are taken from IRS tables, which can be found in the appendix to IRS Publication 463, Travel, Entertainment, Gift, and Car Expenses. Those rates apply to cars first leased in 2017. The full amount in the table applies if the car is leased for the full year and used entirely for business. If the car is leased for less than the full year, or if it is used partly for personal purposes, the inclusion amount must be allocated to business use for the period of the year during which it was used. The allocation for part-year use is made on a day-by-day basis.
Table 9.9 Dollar Amounts for Passenger Automobiles (that are not trucks or vans) with a Lease Term Beginning in Calendar Year 2017
| Fair Market Value of Passenger Automobile |
Tax Year During Lease | |||||
| Over | Not Over | 1st | 2nd | 3rd | 4th | 5th & Later |
| $19,000 | $19,500 | 6 | 13 | 20 | 23 | 27 |
| 19,500 | 20,000 | 7 | 16 | 23 | 27 | 31 |
| 20,000 | 20,500 | 8 | 18 | 26 | 30 | 35 |
| 20,500 | 21,000 | 9 | 20 | 28 | 35 | 39 |
| 21,000 | 21,500 | 10 | 21 | 32 | 38 | 44 |
| 21,500 | 22,000 | 11 | 23 | 35 | 42 | 47 |
| 22,000 | 23,000 | 12 | 27 | 39 | 47 | 53 |
| 23,000 | 24,000 | 14 | 31 | 45 | 54 | 62 |
| 24,000 | 25,000 | 16 | 34 | 52 | 61 | 70 |
| 25,000 | 26,000 | 18 | 38 | 58 | 68 | 78 |
| 26,000 | 27,000 | 19 | 43 | 63 | 75 | 87 |
| 27,000 | 28,000 | 21 | 47 | 69 | 82 | 95 |
| 28,000 | 29,000 | 23 | 51 | 75 | 89 | 103 |
| 29,000 | 30,000 | 25 | 55 | 80 | 97 | 112 |
| 30,000 | 31,000 | 27 | 58 | 87 | 104 | 120 |
| 31,000 | 32,000 | 29 | 62 | 93 | 111 | 128 |
| 32,000 | 33,000 | 30 | 67 | 99 | 118 | 136 |
| 33,000 | 34,000 | 32 | 71 | 104 | 126 | 144 |
| 34,000 | 35,000 | 34 | 75 | 110 | 133 | 152 |
| 35,000 | 36,000 | 36 | 79 | 116 | 140 | 160 |
| 36,000 | 37,000 | 38 | 82 | 123 | 147 | 169 |
| 37,000 | 38,000 | 40 | 86 | 129 | 154 | 177 |
| 38,000 | 39,000 | 41 | 91 | 134 | 161 | 186 |
| 39,000 | 40,000 | 43 | 95 | 140 | 168 | 194 |
| 40,000 | 41,000 | 45 | 99 | 146 | 175 | 202 |
| 41,000 | 42,000 | 47 | 103 | 152 | 182 | 210 |
| 42,000 | 43,000 | 49 | 106 | 159 | 189 | 218 |
| 43,000 | 44,000 | 50 | 111 | 164 | 197 | 226 |
| 44,000 | 45,000 | 52 | 115 | 170 | 204 | 234 |
| 45,000 | 46,000 | 54 | 119 | 176 | 211 | 243 |
| 46,000 | 47,000 | 56 | 123 | 182 | 218 | 251 |
| 47,000 | 48,000 | 57 | 123 | 182 | 218 | 251 |
| 48,000 | 49,000 | 59 | 127 | 187 | 225 | 260 |
| 49,000 | 50,000 | 60 | 130 | 194 | 232 | 268 |
| 50,000 | 51,000 | 63 | 139 | 206 | 246 | 284 |
| 51,000 | 52,000 | 65 | 143 | 211 | 254 | 292 |
| 52,000 | 53,000 | 67 | 147 | 217 | 261 | 301 |
| 53,000 | 54,000 | 69 | 151 | 223 | 268 | 309 |
| 54,000 | 55,000 | 70 | 155 | 229 | 275 | 318 |
| 55,000 | 56,000 | 72 | 159 | 235 | 282 | 326 |
| 56,000 | 57,000 | 74 | 163 | 241 | 289 | 334 |
| 57,000 | 58,000 | 76 | 167 | 247 | 296 | 342 |
| 58,000 | 59,000 | 78 | 171 | 253 | 303 | 350 |
| 59,000 | 60,000 | 80 | 174 | 260 | 310 | 359 |
| 60,000 | 62,000 | 82 | 181 | 268 | 321 | 371 |
| 62,000 | 64,000 | 86 | 189 | 280 | 335 | 387 |
| 64,000 | 66,000 | 90 | 197 | 292 | 349 | 404 |
| 66,000 | 68,000 | 93 | 205 | 304 | 364 | 420 |
| 68,000 | 70,000 | 97 | 213 | 315 | 379 | 436 |
| 70,000 | 72,000 | 101 | 221 | 327 | 393 | 453 |
| 72,000 | 74,000 | 104 | 229 | 339 | 407 | 470 |
| 74,000 | 76,000 | 108 | 237 | 351 | 421 | 486 |
| 76,000 | 78,000 | 111 | 245 | 363 | 436 | 502 |
| 78,000 | 80,000 | 115 | 253 | 375 | 450 | 518 |
| 80,000 | 85,000 | 122 | 268 | 396 | 474 | 548 |
| 85,000 | 90,000 | 131 | 287 | 425 | 511 | 588 |
| 90,000 | 95,000 | 140 | 307 | 455 | 546 | 630 |
| 95,000 | 100,000 | 149 | 327 | 485 | 581 | 671 |
| 100,000 | 110,000 | 162 | 357 | 530 | 635 | 733 |
| 110,000 | 120,000 | 181 | 397 | 589 | 706 | 815 |
| 120,000 | 130,000 | 199 | 437 | 649 | 777 | 898 |
| 130,000 | 140,000 | 217 | 477 | 708 | 849 | 980 |
| 140,000 | 150,000 | 232 | 517 | 768 | 929 | 1,062 |
| 150,000 | 160,000 | 254 | 557 | 827 | 991 | 1,145 |
| 160,000 | 170,000 | 272 | 597 | 887 | 1,062 | 1,227 |
| 170,000 | 180,000 | 290 | 637 | 946 | 1,134 | 1,309 |
| 180,000 | 190,000 | 308 | 677 | 1,006 | 1,205 | 1,391 |
| 190,000 | 200,000 | 326 | 718 | 1,064 | 1,277 | 1,473 |
| 200,000 | 210,000 | 345 | 757 | 1,124 | 1,348 | 1,556 |
| 210,000 | 220,000 | 363 | 797 | 1,184 | 1,419 | 1,638 |
| 220,000 | 230,000 | 381 | 837 | 1,244 | 1,490 | 1,721 |
| 230,000 | 240,000 | 399 | 878 | 1,302 | 1,562 | 1,803 |
| 240,000 | and over | 418 | 917 | 1,362 | 1,633 | 1,885 |
Remember that if you use your car for commuting or other nonbusiness purposes, you cannot deduct that allocable part of the lease; there is no inclusion amount for this portion.
There are separate inclusion amount tables for trucks and vans first leased in 2017. This information can be found in IRS Rev. Proc. 2017–29 (Table 6).
Should You Lease or Buy?
The decision to lease or buy a vehicle used for business is not an easy one. There are many financial advantages to leasing. Most important is that you need not put forth more than a small amount of up-front cash to lease, whereas a purchase generally requires a significant down payment. So leasing can enable you to drive a more expensive vehicle than you could afford to buy. However, as a practical matter, if a car is driven extensively (more than 15,000 miles per year), leasing may not make sense because of the annual mileage limit and the charge for excess mileage. In such cases, owning may be preferable. Take into consideration that at the end of the lease term you own nothing, whereas at the end of the same period of time with a purchased vehicle, you own an asset that can be sold or traded in for a newer model. And, if you want to get out of the lease before the end of the lease term, there may be substantial penalties and fees (although there may also be ways to avoid them).
Whether there are any tax advantages is difficult to say. With leasing, you deduct the entire lease charge; with a purchase, you generally deduct depreciation, although you may be able to fully expense up to $25,000 for a vehicle weighing more than 6,000 pounds. Given the current dollar limits on depreciation, this may not be as great as the lease charge. While the inclusion amount is designed to offset this differential, it may not be sufficient to make leasing and depreciation equate.
The only way to know whether leasing or buying is more advantageous tax-wise is to run the numbers. Project your deductible costs of leasing versus your costs of purchasing the car, truck, or van for your business.
Arranging Vehicle Ownership
If you have a corporation, should you or your corporation own the vehicle you will use for business? From a tax standpoint, it is generally wise to have the corporation own the vehicle because the corporation can fully deduct the expenses of the vehicle (subject, of course, to the dollar limit on depreciation). If you own the vehicle, your deductions are limited to those relating to business use and can be claimed only as itemized deductions subject to a floor of 2% of your adjusted gross income and an additional reduction if you are a high-income taxpayer.
For insurance purposes, coverage for business-owned vehicles can be more expensive than personal coverage. However, in some cases, it may still be more advantageous to have the corporation own the vehicle. If the corporation owns several vehicles, it can command better insurance rates than an individual who owns only one vehicle. Also, if the vehicle is involved in an accident, the corporation's insurance rates are not affected. If you own the vehicle and it is in an accident, your personal insurance rates will usually be increased.
Finally, if there is a lawsuit involving the vehicle, it is generally preferable to have the corporation sued rather than you personally, since a recovery against the corporation is limited to corporate assets.
Employee Use of an Employer-Provided Car
If your employer gives you a car to use for business, you may be able to deduct certain expenses. Your deduction is limited to the actual expenses of operating the car that were not reimbursed by your employer. The amount of the deduction depends on the amount your employer includes in your income and the number of business and personal miles driven. Your personal use is reported annually on your Form W-2 (see Chapter 7). If your employer owns the car you use, you cannot use the standard mileage allowance for car expenses.
What Is Included on Your W-2?
The employer has a choice of what to report. The employer can either report the actual value of your personal use or assume that you used the car entirely for personal purposes and include 100% of the benefit in your income. This 100% amount is based on the annual lease value for the car (explained in Chapter 7). The full amount reported on your W-2 is income to you. Your W-2 will note whether the 100% annual lease value or actual personal use was reported. Even though you must include the full amount reported on your W-2, whatever it might be, you may be able to reduce your income tax. You can offset this income to the extent that what was reported as personal use was actually business use and you deduct your business expenses. Where to claim these business deductions is detailed at the end of this chapter.
If your employer reported 100% of personal use even though you used the car in part for business, you can deduct your actual expenses for business use that were not reimbursed by your employer. If your employer included only a portion of the use of the car designed to reflect your personal use, then you can deduct any actual expenses for business use that were not reimbursed by your employer.
Vehicle Trade-In
When you are ready to dispose of your old car and find a replacement, what is the best way to handle the arrangements from a tax perspective? Trade it in? Sell it?
Option 1: If you trade in the old car to buy a new one, the arrangement can be considered a tax-free exchange if you elect this treatment. The result: The basis of the new car is the remaining basis of the old car, if any, plus any cash paid toward the new car. And if the car that is traded in was used only partially for business, a special adjustment is required for purposes of figuring depreciation on the newly acquired car. In this case, you figure basis of the old car as if it were used entirely for business (i.e., you must reduce basis as if you had depreciated 100% of the car's basis). This severely limits your ability to claim write-offs for the new car.
Option 2: If you sell the old car to buy a new one, gain or loss results from the difference between the basis of the old car and the amount you receive for it. If the basis is less than what you receive, you have a taxable gain; if the basis is more than what you receive, you have a taxable loss.
Before deciding on which alternative to use, consider the tax results in your situation. If, for example, you are disposing of a large SUV or truck, you may have a taxable gain since you may have already reduced the basis of the car substantially (remember that vehicles that weigh more than 6,000 pounds are not subject to the depreciation dollar limits). In this case, a trade-in postpones gain recognition. However, if you are disposing of another type of vehicle, one with a tax basis that is higher than its fair market value, a sale can produce a taxable loss so a trade-in is ill-advised.
Trucks and Vans
Trucks (including SUVs) and vans that are configured in such a way as to be used for personal purposes only minimally are not subject to the dollar limits on depreciation that apply to passenger cars weighing no more than 6,000 pounds. These trucks and vans are referred to as qualified nonpersonal use vehicles.
Modifications likely to render a truck or van a qualified nonpersonal use vehicle include having a front jump seat, permanent shelving that fills the cargo area, and advertising or a company name printed on the side.
Trucks and vans that are not qualified nonpersonal use vehicles are subject to the following rules:
For vehicles with a gross vehicle weight rating in excess of 6,000 pounds but not more than 14,000 pounds, the dollar limits on depreciation do not apply (see the treatment of heavy SUVs earlier in this chapter). Their cost can be expensed up to $25,000 or depreciated as 5-year property without any dollar limit on the annual deduction.
For lighter vehicles, special dollar limits apply. These dollar limits are slightly higher than for passenger cars. Table 9.10 shows the dollar limits for light trucks and vans first placed in service in 2017.
Table 9.10 Dollar Limits for Light Trucks and Vans
| Tax Year | Dollar Limit |
| First year (2017) | $11,560* |
| Second year (2018) | 5,700 |
| Third year (2019) | 3,450 |
| Each succeeding year | 2,075 |
*$3,560 if the vehicle does not qualify for bonus depreciation.
Credit for Plug-In Electric Vehicles
There are certain tax credits applicable to certain electric vehicles.
4-Wheel Vehicles
There is a credit for a new plug-in highway-ready electric vehicle purchased and placed in service in 2017. The credit is up to $7,500, regardless of the weight of the vehicle.
The full $7,500 credit for such vehicles as the Chevy Volt, Ford Focus Electric, Tesla Model S, and Nissan Leaf applies only to 200,000 cars per manufacturer; there is a partial credit for up to a year after this limit is reached. The IRS has approved about 30 vehicles for the credit, although not all qualify for the full $7,500 amount.
If the vehicle is purchased for business, it is part of the general business credit (see Chapter 23).
The credit can be claimed for both regular tax and alternative minimum tax purposes (see Chapter 28).
2-Wheel Vehicles
The credit for a 2-wheel plug-in electric vehicle expired at the end of 2016. The following is included here in case the credit is extended for 2017. Check the Supplement for details. There is also a credit for a 2-wheel electric vehicle (electric motorcycle). The credit is 10% of the cost of the motorcycle, for a maximum credit of $2,500. The motorcycle must have a battery capacity of at least 2.5 kilowatt-hours, be manufactured primarily for use on public streets, roads, and highways, and be capable of achieving speeds of at least 45 miles per hour.
Reimbursement Arrangements
If your employer reimburses you for the business use of your car, you may or may not need to claim deductions. The answer depends on the reimbursement arrangement with your employer.
Accountable Plan
If your employer maintains an arrangement that reimburses you for business-related use of the car, requires you to adequately account to the employer for these expenses, and also requires you to return within a reasonable time any advances or reimbursements in excess of these expenses, then the plan is treated as an accountable plan. (For details on adequate accounting under accountable plans and returning excess amounts within a reasonable time, see Chapter 8.) If your employer maintains an accountable plan for reimbursement of business expenses and the amount of reimbursement does not exceed the standard mileage allowance, the reimbursements are not reported on your W-2, and you do not deduct any expenses. If the reimbursements exceed the standard mileage allowance, only the excess over the standard mileage allowance is included on your W-2. You may then deduct your actual expenses that exceed the standard mileage rate.
Nonaccountable Plan
Your employer must include on your W-2 form all reimbursements made under a nonaccountable plan.
Recordkeeping for Vehicle Expenses
Regardless of whether you use the actual expense method or the standard mileage allowance for your car (or a car that your employer provides you with), certain recordkeeping requirements apply. You must keep track of the number of miles you drive each year for business, as well as the total miles driven each year. You must also record the date of the business mileage, the destination of the business travel, and the business reason for the car expense. An unsubstantiated deduction for business driving is one of the most common audit issues. Even though you drive your vehicle for business, without the proper records your deduction may be limited or denied entirely.
It is advisable to maintain a daily travel log or diary in which you record the date, the destination, the business purpose of the trip, and the number of miles driven (use the odometer readings at the start and end of the trip, and then total the miles for each trip). Be sure to note the odometer reading on January 1 each year (Table 9.11).
If you use the actual expense method, you must also keep a record of the costs of operating the car. These include the cost of gasoline and oil, car insurance, interest on a car loan (if you are self-employed), licenses and taxes, and repairs and maintenance. Record these amounts in your expense log or diary.
If you lease a car, you must keep track of the amount of the lease payments, in addition to the number of miles driven (and the number of business miles), the dates of travel, the destinations, and the purpose for the travel.
Use a diary or log to keep track of your business mileage and other related costs. You can buy a car expense log in stationery and business supply stores or reproduce the blank log in Table 9.11. Table 9.12 is a model of an IRS sample daily business mileage and expense log.
Table 9.11 Business Mileage Log
| Odometer Readings | Expenses | ||||||
| Date | Destination | Business Purpose | Start | Stop | Miles This Trip |
Type | Amount |
Table 9.12 Sample Log
| Odometer Readings |
Expenses | ||||||
| Date | Destination | Business Purpose |
Start | Stop | Miles This Trip |
Type | Amount |
| 5/4/17 | Local—St. Louis | Sales calls | 8,097 | 8,188 | 91 | Gas | $38.00 |
| 5/5/17 | Indianapolis | Sales calls | 8,211 | 8,486 | 275 | Parking | 5.00 |
| 5/6/17 | Louisville | Bob Smith (potential client) | 8,486 | 8,599 | 113 | Gas Repair Flat tire | 37.80 |
| 10.00 | |||||||
| 5/7/17 | Return to St. Louis | 8,599 | 8,875 | 276 | Gas | 38.25 | |
| 5/8/17 | Local—St. Louis | Sales calls | 8,914 | 9,005 | 91 | ||
| Weekly total | 8,097 | 9,005 | 846 | 129.05 | |||
| Year-to-date total | 5,883 | $1,074.75 | |||||
You can also use your smartphone to keep mileage records. I use MileIQ to track business mileage, but there are many other apps you can use for this purpose.
It is essential that you keep a written record of the business use of your car. You must note on your tax return whether you have such a record. Remember that your return is signed under penalty of perjury.
Proving Expenses with a Mileage Allowance
Generally, required recordkeeping includes tracking the odometer at the start and end of each business trip (as well as the date, destination, and purpose of the trip). However, the IRS permits “sampling” in some situations. You are treated as having adequate substantiation if you keep records for a representative portion of the year and can demonstrate that the period for which records are kept is representative of use for the entire year.
Sampling may not be used if you cannot show a consistent pattern of car use. Also, not all substantiation shortcuts are acceptable. For instance, one taxpayer used mileage figured by a computer atlas to substantiate his car expenses. Unfortunately, the Tax Court rejected this method, observing that he failed to keep track of his odometer readings at the time the expenses were incurred.
If your employer pays for car expenses with a mileage allowance, it is generally considered to be proof of the amount of expenses. The amount of expenses that can be proven by use of this allowance is limited to the standard mileage allowance or the amount of a fixed and variable rate (FAVR) allowance that is not included on your W-2. The FAVR allowance includes a combination of fixed and variable costs, such as a cents-per-mile rate to cover variable operating costs (e.g., gas, oil, routine maintenance, and repairs) and a flat amount to cover fixed costs (e.g., depreciation, insurance, registration and license fees, and personal property taxes). The FAVR allowance applies only if the car is used for certain employees. Thus, use of this allowance is the employer's choice, not the employee's.