If you’re self-employed and you or your employees use a vehicle to conduct business, it’s important to know the latest tax rules. First, business-related vehicle expenses can generally be deducted using either the:
- Mileage-rate method (54 cents per mile driven in 2016), or
- Actual-cost method (total out-of-pocket expenses for fuel, insurance, repairs and other vehicle expenses, plus depreciation).
When buying new or used vehicles, every size and structure of business should look into expensing under Internal Revenue Code Section 179. Many rules and limits apply.
For example, the normal $500,000 Sec. 179 expensing limit generally applies to vehicles with a gross vehicle weight rating of more than 14,000 pounds. A $25,000 limit applies to vehicles (typically SUVs) rated with a gross vehicle weight at more than 6,000 pounds.
Vehicles rated at 6,000 pounds or less are subject to the luxury automobile limits.
For passenger autos placed in service in 2016, the first-year depreciation limit is $3,160. The amount that may be deducted under the combination of Modified Accelerated Cost Recovery System (MACRS) depreciation and Sec. 179 for the first year is limited under the luxury auto rules to $11,160.
In addition, if a vehicle is used for business and personal purposes, the associated expenses, including depreciation, must be allocated between deductible business use and nondeductible personal use. The depreciation limit is reduced if the business use is less than 100%. If business use is 50% or less, you can’t use Sec. 179 expensing or the accelerated regular MACRS; you must use the straight-line method.