As a business owner, you want to be able to minimize your business taxes. The key to this is managing your tax deductible expenses. Here are some things to consider when covering some of the bigger tax deductible items, like your work vehicle and depreciation.
Your work vehicle is considered tax deductible equipment.
Just like a generator, nail gun, or table saw, is a piece of equipment you use for work, your work vehicle is considered equipment, and therefore can be tax deductible via a few different avenues, namely depreciation and/or loan payments on a vehicle.
If you’re a sole proprietor, meaning you work for yourself, and not a separate legal entity like an LLC or corporation, your federal income tax returns will include a Schedule C, which lists all of the categories of tax deductible expenses.
Fuel, depreciation, and “rent” can all be applied to vehicle expenses.
If you purchase a vehicle for work, you can write off the entire cost over time through depreciation.
Depreciation is the “wear and tear” on your vehicle, or the change in value as your vehicle gets older. The older your vehicle is, the more it depreciates and the less it’s worth.
When you buy a new vehicle for work, you can deduct the full purchase price as tax expenses over time through depreciation. For example, if you buy a truck for $50,000, current depreciation guidelines let you reduce the value of your truck by 20% per year. That means you can write off $10,000 per year for five years. These depreciation expenses can be a major factor in lowering your tax burden.
Vehicle lease payments can be treated like rent payments.
Did you know rent can apply to your vehicle? It can; but only if you lease your vehicle. Rent expense is another major tax deductible item, and leasing a vehicle is treated just like rent on a building. In this case, the total amount of your auto lease payments are fully tax deductible - a $500 monthly lease payment means you have a $6,000 expense that you don’t have to pay taxes on. The type of lease can impact this, so be sure to talk to your tax preparer to learn what it means for you. For example, if you get a bank loan to pay for your vehicle instead of leasing it, only the interest on that loan is tax deductible, so leasing a vehicle can be an advantage for your business.
Keep your receipts to deduct fuel, maintenance, and repairs.
Fuel expense is another category of expenses that are tax free, meaning the total amount of fuel you use in a year is tax deductible, in addition to lease payments and depreciation. Vehicle repairs and other consumables like oil, coolant, and grease, are all considered expenses too. For all vehicle-related expenses, you need to keep your receipts for when you file your taxes.
There are many tax deductible expenses associated with your work vehicle. The best way to maximize your deductions is to consult with your tax preparer. They will be familiar with the expenses that apply to your business, and can make sure you’re taking advantage of everything you can to reduce the business taxes you pay, giving you more cash in your pocket.