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Small Business Tips

Business vehicle depreciation — how auto write-offs work

Linzi Martin

When you invest in a business vehicle, there are certain tax deductions you can take. One of the more popular options is a business vehicle depreciation deduction. You can benefit from this type of deduction if you use the actual expense method. Below we’ve outlined some of the basics you should know about business vehicle depreciation and how it works as a write-off.

What is business vehicle depreciation?

Business vehicle depreciation refers to the amount of wear and tear a company vehicle, SUV, or truck experiences in its lifespan. Similar to personal cars, your business vehicle declines in value over time. With a vehicle depreciation deduction, small business owners can get a tax break, but as always, IRS restrictions apply.

To keep things simple, let’s first start with which deduction method you should use. As mentioned earlier, the actual expense method is your only option for using the business vehicle depreciation deduction. You cannot utilize the standard mileage rate because it already factors in depreciation.

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What business vehicles qualify for depreciation?

A vehicle must meet the following stipulations to be considered a tax deductible business expense:

  • You must use the vehicle for business purposes
  • You must own the vehicle (leasing is not applicable)
  • Ownership of the vehicle must exceed more than one year
  • Evidence of utility over the life of the vehicle

Additional rules apply if the vehicle qualifies as a “passenger vehicle”. In this instance, you’re limited to specified depreciation ceilings that vary annually. You can visit the IRS website to see where your passenger vehicle falls in limitations.

How does business vehicle depreciation work?

This auto-related deduction lets you seamlessly write off your investment, which is often referred to as your “basis”. In layman’s terms, the basis factors in how you purchased your business vehicle and when you started using it for business purposes. Because depreciation accumulates over time, the amount of wear and tear each year affects the adjusted basis of the vehicle.

Now, how exactly do you calculate business vehicle depreciation? To compute business vehicle depreciation for the year, you must multiply the basis amount by the percentage of business use of your vehicle. Suppose that you use a business vehicle 100% of the time for your expanding HVAC business, then you can depreciate its entire basis. You may deduct its entire cost of ownership and operation.

The IRS offers two depreciation deduction methods: straight-line method and accelerated depreciation. While straight-line gives you equal deductions each year besides the first and last year, the accelerated method provides you with larger deductions in your first few years of ownership. There is no right or wrong way to depreciate. In many cases, the difference in straight-line method and accelerated depreciation is miniscule.

Do I need to keep records?

Now that you know the limits of business vehicle depreciation and how to calculate it, it’s critical to note the importance of recordkeeping. To the same extent you keep a detailed log for mileage tracking with MileIQ, the same should be done for business vehicle depreciation. It’s a good rule of thumb to keep accurate accounts of all business expenses in the event an IRS audit is requested.

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