Cars are one of the most expensive items to own, both in terms of the initial investment we make in them and in the cost of ongoing maintenance.
Fortunately, there are valid ways to offset these expenses with tax deductions. You might qualify for one or more of these options for personal, small business, self-employed or business deductions. (If you’re not taking advantage of these deductions, you could be missing out on tax savings, start planning for next year!)
1. Charitable Contributions
If your old car isn’t going to make it much longer, and the cost of repair isn’t worth the investment, consider donating it to charity rather than trying to make a little money selling it used. You’ll save the hassle of putting up an ad and dealing with potential buyers who want to talk you down from your price. And if you know your car isn’t worth a whole lot, you may be better off donating it, which will give you a deduction for the market value the car still has. Many charitable organizations will even pick up your donated car for you. This method of tax deduction can apply to personal or business application, just make sure you get an official receipt from the charity, which should include the value of the vehicle you donated.
2. Convert Your Car
Keeping your current car but wanting to reduce emissions? Look into a electric drive conversion kit, which you can hire a professional mechanic to install onto your car. Before you purchase the kit, get a mechanic’s opinion on whether your car is worth converting; in some cases, such as on older cars that don’t have much life left in them, the cost of conversion may be an investment not worth making. But if you have a newer car with a lot of life left in it, converting can save you on fuel daily as well as giving you a nice tax credit, up to $4,000.
3. Deduct Business Use
If you are a freelancer and otherwise self-employed individual, you can deduct the cost of business use, even if it’s on your personal vehicle. This is the best method for those who work under a sole proprietorship rather than as a legal business structure such as a corporation. The key here is to separate business use from personal use, which can be done by using some sort of tracking mechanism like CarCheckup, a small device which plugs into your car for business trips and then uploads mileage information and other data to your computer when you plug it in via USB.
4. Small Business Fleet Deductions
If you’re running a small business, a vehicle used exclusively for business can add to your yearly tax deductions as part of your operating expenses. While the cost of overhauling a business vehicle doesn’t qualify as a deduction the cost of repair can be deducted. Keep clear records of repairs, because just claiming an estimated cost won’t go over well with the IRS.
5. Unreimbursed Business Expenses
If you’re employed by a company and have used your own personal vehicle for business-related purposes, you can claim those expenses on your tax deduction if your company has not reimbursed you. These expenses could include fuel costs and maintenance, and are usually best calculated by using a per-mile cost, which the IRS updates on a regular basis. As with self-employed tax deductions, the key is to keep clear records and differentiate between business use and personal use.
The Bottom Line
Unless you’re using your car exclusively for your business, you can’t deduct the full cost of purchasing, maintaining and repairing it. You can and should, however, deduct what you can. The key, as with almost any issue to do with the IRS, is having clear records to support your claims.