Since there are so many different ways to depreciate your car on your taxes, it can be challenging to pick the right strategy for your business. Therefore, we put together this guide to help you choose the most optimal way to depreciate your vehicle on your taxes.
As a reminder, when you depreciate your vehicle, you have to use the actual expense method. For more information on the actual expense method, check out our article comparing the standard mileage rate to the actual expense method.
The straight-line method is the simplest way to depreciate your business vehicle on your tax return. The federal tax code states that autos and trucks are to be depreciated over five years.
Let’s say that you purchased a $40,000 car that you use exclusively for business. In this case, you would be able to depreciate $8,000 each year for the next five years.
Straight-line is the easiest method to implement yourself and stay compliant with the IRS. However, as you will see, it is not the most optimal strategy.
Bonus depreciation allows you to accelerate the depreciation on your business vehicle so you can benefit from more immediate tax savings. Under bonus depreciation, the 2022 depreciation limits for a business vehicle under 6,000 pounds are:
- Year 1: $18,200 ($10,200 + $8,000) (20% of purchase price)
- Year 2: $16,400 (19.2% of purchase price)
- Year 3: $9,800 (11.52% of purchase price)
- Year 4 and each subsequent year: $5,860 (6.56% of purchase price)
Again, let’s say that you purchased a $40,000 car that you use exclusively for your business. In this case, you would be allowed to depreciate the following amounts each year:
- Year 1: $16,000
- Year 2: $12,800
- Year 3: $7,680
- Year 4: $3,520
Section 179 Plus Bonus Depreciation
Section 179 only applies to vehicles that weigh more than 6,000 pounds. Although Section 179 can be more restrictive and challenging to implement, the tax savings can be enormous.
In 2022, Section 179 allows you to immediately expense up to $26,200 of the vehicle’s purchase price. Plus, when Section 179 is used in conjunction with bonus depreciation, you will be able to expense the total purchase price of the vehicle in year 1.
Let’s say you purchased a Tesla Model X in 2022 that you will use exclusively for business. The Tesla Model X has an MSRP of $85,000 and a gross vehicle weight rating of 6,250 pounds.
Below, you will see how you can expense the car’s full purchase price in the first year. It does not matter if the car is brand new or used. Also, you can finance the purchase and do not have to pay the full value of the vehicle in year one.
- Section 179 Deduction: $26,200
- Bonus Depreciation : $58,800
- Total Year 1 Deduction: $85,000
Business owners should always try to maximize their deductions in the current year. After all, a dollar today is worth more than a dollar tomorrow. Thankfully, the IRS offers bonus depreciation and Section 179, so business owners can reduce their taxes and invest the profits back into the business.
At Windstone Financial, we specialize in helping business owners reduce their tax liability and build wealth. We have helped numerous business owners reduce their taxes and improve their cash flows by optimizing their vehicle’s depreciation. If you plan to purchase a new business vehicle soon, click the button below to speak with a CPA today!