Wondering How to Write off a Car?
Tax season is a dreaded time of year for those who know that they will be writing a check instead of receiving a refund. Filers who are filling out those tax forms might be looking for applicable deductions or credits that can offset what they owe. Filers might believe that buying a new car holds the keys to a write-off or deduction.
Filers wondering how to write off a car might not find the answer they want. Here are five things to know about how a car purchase could impact taxes.
- Businesses can deduct certain car expenses
- Individuals can deduct state/local income taxes or general sales tax (not both, though)
- Electric car credits phase out after a specific number of models are sold
- Charitable car donations can be a deduction
- Electing to take the standard deduction for individuals negates individual deductions (but not business deductions)
Businesses Can Deduct Certain Car Expenses
Business owners and those who are self-employed can deduct specific car expenses. In fact, the Internal Revenue Service provides a page dedicated to what can be deducted related to business vehicles.
The IRS explains that there are two ways to deduct expenses: actual expenses or opting for the standard mileage rate. Actual expenses include depreciation, repairs, insurance, etc. Business owners must keep records for both deduction options.
What about an employee who commutes to and from clients for work? Can they take deductions? The IRS explains: “Employees who use their car for work can no longer take an employee business expense deduction as part of their miscellaneous itemized deductions reported on Schedule A. Employees can’t deduct this cost even if their employer doesn’t reimburse the employee for using their own car.”
Individuals Can Deduct State and Local Income Taxes or General Sales Tax (NOT Both)
Some employees take the standard deduction, but others opt to itemize their expenses. Itemizing could result in a higher overall deduction for those who have lots of medical bills or other expenses.
The sales tax of a car purchase also could be an applicable deduction. However, if the individual deducts state and local income taxes, they cannot deduct general sales tax. This stipulation is noted on Form 1040 Schedule A.
Those who take the standard deduction also cannot itemize personal deductions. However, itemized business deductions are different from individual deductions.
As there are many specifications related to the Tax Code, though, filers should consult with a certified public accountant or tax professional to discuss any applicable deductions.
Electric Car Credits Phase Out
Electric cars are extremely energy efficient and eco-friendly. They also are linked to a tax credit, which could be very beneficial for some filers. Unfortunately, not every electric car still qualifies for this tax credit.
Per the IRS: “The credit begins to phase out for a manufacturer’s vehicles when at least 200,000 qualifying vehicles have been sold for use in the United States (determined on a cumulative basis for sales after December 31, 2009).”
Buyers who are wondering what vehicles still qualify for the credit and which vehicles have been phased out of the credit can use the resource page from the IRS to look up a particular model. Tesla’s models have phased out of the credit already.
Donating a Car to Charity Can be a Deduction
Some charities accept car donations. Typically, car owners will donate an older car that they no longer want or need. The car is picked up by the charity and sold at auction.
Those who donate their vehicle should receive information from the charity about the sale of their vehicle. Car owners should keep the documentation when they are taking the charitable donation as a tax deduction.
For car owners interested in donating a vehicle to charity, the IRS provides a booklet about vehicle donations. This is a great resource for car owners to figure out if donating the vehicle is the best option.
For example, individuals who don’t itemize their deductions cannot take the charitable deduction. For these filers, the donation will only be an act of charity and won’t provide any tax benefits.
Taking the Standard Deduction Negates Individual Tax Deductions
Filers can elect to take the standard deduction or itemize their personal expenses. However, filers cannot do both. If the filer also has a business or is self-employed, they can separately itemize business expenses.
Those who take the standard deductions can’t opt to deduct sales tax or state and local income taxes. Filers need to choose, and they need to understand if the standard deduction or if itemized deductions will provide the greatest benefit.
Understanding the Tax Code
There are so many laws and regulations within the Tax Code. It can be overwhelming for filers to understand what deductions are applicable, which credits are still available and if the standard deduction is the best option.
Filers who have a lot of tax questions might be better off working with a CPA or tax professional. CPAs understand the Tax Code and can guide filers on claiming credits, taking deductions and how to handle any applicable business expenses.
Taking a credit or a deduction without qualifying could result in an audit, fines or worse. If filers are unsure about a tax detail, they should consult a professional.
The Vehicle Purchase Price is Not a Deduction for an Individual
For the average individual filing their taxes, the purchase of a new vehicle is not something that is a tax write-off. Individuals cannot deduct the price they paid for the vehicle.
However, those who itemize their individual expenses could deduct general sales tax. To find out if this is an option, talk to a CPA or tax professional. If individuals also deduct state and local income taxes, though, they cannot deduct general sales tax.
While the price of that new car isn’t a write-off for the typical individual, if they purchased an electric model, they could claim a tax credit. This credit could help reduce the taxes owed. While many Tesla models have phased out of the credit, there are still many models that are applicable for all or a portion of this credit.
Beware of Scammers
Tax season might be dreaded by those who know they will have to write a check instead of receiving a refund. However, it’s also prime time for scammers.
Filers might prefer to get a refund than pay more taxes, but refunds are never a guarantee. In fact, filers need to be wary of any tax preparer who promises a refund. Some preparers refuse to sign a tax return; these preparers are known as ‘ghost preparers.’ The IRS warns of the following actions of a ghost preparer:
- They require filers to pay in cash (and won’t give a receipt)
- Inflate or invent income (this helps them claim credits)
- Include fake deductions (this increases the refund)
- They will send the refund to their account, not the filer’s account
Filers can report a ghost preparer to the IRS. However, the IRS also provides a query tool to help filers find reputable CPAs and tax professionals. Those who need to find a tax preparer in their area can use this resource.
Tax filers also could receive a phone call from an individual purporting to be from the Bureau of Tax Enforcement (it doesn’t exist). The caller may threaten that the police will arrive to arrest the individual if taxes aren’t paid. The IRS warns of this scam and explains that they would make contact with filers in other ways. There are numerous other tax scams that are used to dupe honest individuals.
While tax season can be stressful for filers, working with a professional can help ease some of the stress. Not everyone can deduct car expenses, and individuals should only take deductions and credits for which they qualify.