If you own a business and lease a vehicle for work purposes, you may qualify to deduct a portion of the costs you pay for it on your taxes. This is a great way to reduce your small business tax bill, but you must be careful about handling it because there are a few nuances to the process.
Owning and operating a car can be one of your most expensive investments if you’re a small business owner. Consider writing off your car costs for tax purposes.
Fortunately, there are several ways to do so. Some of them are simple, and some require more work.
Tax deductions
Often, people need to realize that they can save their business thousands of dollars in taxes each year by simply applying for and taking advantage of some very common deductions.
The IRS allows many tax deductions for small businesses, including payroll taxes, qualified health and retirement plans, a home office, energy-efficient buildings, etc. These deductions can lower a business owner’s income and reduce the self-employment tax owed.
One way to save money on your taxes is to claim car expenses used for business purposes. However, writing off vehicle costs is tricky, and it can be difficult to prove how much you’ve spent.
If you want to deduct an expense from your business use of vehicles, the best way is to keep an expense log for all of your work-related trips and mileage. Then, you can divide your miles by a standard amount set by the IRS to determine how much you can claim.
Another good way to save money on your taxes is to take advantage of pre-tax deductions usually available through employers. For example, many businesses offer a payroll deduction for employees that pay into a company-sponsored retirement plan.
In addition to deducting the cost of your employer-sponsored benefits, you can also remove the interest you pay on your business loan from your tax bill. This can be a great way to avoid paying taxes on your loan and help you start paying off your debt.
Depreciation
If you run a business, you know that your equipment, vehicles, furniture, and other assets decrease in value over time. As a result, how do you calculate the depreciation amount you can claim on your taxes?
Many businesses use accounting software to keep track of their assets and calculate their depreciation schedules. This ensures accuracy and eliminates the need for firms to juggle multiple spreadsheets. Additionally, it can reduce the chance of errors and improve the timeliness of yearly reports.
Lease payments
When deciding whether to lease or purchase a vehicle for your business, it’s essential to consider all the factors involved. For example, the upfront costs of renting a car may be less expensive than purchasing a similar model, opening up more cash for your business.
In addition, you can write off some of the expenses associated with your leased vehicle, including your lease payments and tires, oil changes, and registration fees. Keep track of these receipts so you can calculate your tax savings.
The IRS allows you to deduct the cost of your leased car using one of two methods: actual costs or standard mileage rate. Both methods will enable you to write off your vehicle’s monthly lease payment and related expenses, but which way is better depends on your situation and needs.
With the standard mileage approach, you can deduct the total miles your leased car has traveled for work purposes.
To calculate your car lease deduction under the standard mileage rate method, you must estimate how many miles you plan to drive your leased car for business during your lease. You’ll then multiply your estimated business miles by the current-year IRS mileage rate to get your deduction.
Repairs
If you own a business or are self-employed, you can claim the cost of repairs on your federal taxes. This is a great way to save your company thousands of dollars in taxes.
Insurance companies decide whether a vehicle is a write-off based on the total cost of repairing it versus its value. This is called the “repair-to-value ratio” and varies from insurer to insurer.
The car’s damage may be minor, but the costs of repairing it can still be a considerable sum. The assessors who work on your vehicle will look at the repair costs and tally them with the car’s market value before it was damaged.
Your car could be classified as a write-off depending on the type of accident. For example, category A cars are completely unsalvageable and unsafe to drive. They must be crushed, but you can keep your vehicle’s body and other parts.
Many people prefer to keep their write-offs and do their repairs. This can be a great option if you want to save money on repairs, but it also means that you must be extra careful when buying a second-hand vehicle with a write-off.
