Most people who drive for business calculate their car loan tax deduction using the standard mileage rate. In many cases, this deduction adds up to a significant amount and is worth the effort to claim. But, don't forget to check these three often-overlooked business vehicle tax deductions for your business car.
The answer to “is car loan interest tax deductible?” is normally no. But, you can deduct these costs from your income tax if it's a business car. It can also be a vehicle you use for both personal and business purposes, but you need to account for the usage. It’s good form to keep track of all business use for your car so you can accurately report it when it’s time to file.
You cannot deduct the actual car operating costs if you choose the standard mileage rate. The standard mileage rate already factors in costs like gas, taxes, and insurance. You can't even deduct depreciation from your business car because that's also factored in.
If you use the standard mileage rate, you are still allowed to deduct the following three actual expenses:
You can deduct these items because they do not factor into the standard mileage rate amount.
You may deduct interest on a loan for a car you use in your business. Taxpayers can even deduct the interest if you take out a home equity loan to buy a business vehicle. You can deduct only the business use percentage of interest and taxes on a car you use for business and personal reasons.
The largest expense is usually the business car loan interest. Unfortunately, many people fail to deduct it because of confusion about the tax law. You can't deduct the loan interest on a personal car but you can for a business vehicle.
If you're an employee, you may not deduct interest on a car loan even if you use the car 100% for your job.
The answer to “is auto loan interest tax deductible?” gets more complicated if the car is used for both personal and business reasons.
Example: Ralph uses his car 50 percent for his business and 50 percent for personal trips. He uses the standard mileage rate to deduct his car expenses. Ralph pays $3,000 a year in interest on his car loan. He may deduct 50% of this amount, or $1,500, as a business operating expense in addition to his business mileage deduction.
So, even if you use the standard mileage rate, make sure to keep track throughout the year of how much you pay for parking and tolls, and deduct it along with the business percentage of your car loan interest, and property tax you paid when you bought your car. These vehicle deductions can add up.
Typically, no. If you use the actual expense method, you can write off expenses like insurance, gas, repairs and more. But, you can't deduct your car payments.
Instead, you can deduct the cost of your vehicle through depreciation. You may deduct the business portion of lease payments, though.