Deducting Business Use of a Car and Recapture

I love getting a good deal!

One of the greatest things of running a business is that you get to deduct business expenses.  I live in California and for the most part when I buy a business item, I almost feel like I get it for about 35% off!

How did I get 35%? Well i’m in the 28% federal bracket and about like 9.3% in the state bracket.  That’s like 35%ish. Close enough 😀

Tax is super complicated

Now I could write about 20 articles on how complicated deducting business use of a car is and I don’t really want to do that. Also I’m not an expert in all the various issues, so this story is more about my situation and my expenses, deductions, and taxes. Hopefully others can find it useful as well.

How complicated is it?

Well here’s some factors that affect how you should write this off.

  1. Did you buy or lease?
  2. Was the car new or used?
  3. What kind of car did you buy and how much does it weigh? (really)
  4. Do I pick standard mileage deduction or actual costs?
  5. Does my state have state taxes vs sales tax?
  6. Do I use Section 179 deduction or MACRS?
  7. What if I sell my car?
  8. What percentage of the car was used for business vs personal?

Basically it’s really complicated but if you’re a glutton for mental pain than you should read the IRS site like I did.

My numbers

I bought my car in Oct 2013 for $42,000.  I just sold my car to the dealer (I moved and had to do a quick sale) Jan 2016 for $27,000

So in 27 months I had a depreciation of $15k.  Wow, what a waste of money >_<

But at least I got to write off some this as a business deduction! Because my car was new and cost quite a pretty penny, I went with itemizing “Actual Costs” vs using the “Standard Mile Deduction”.  In a nutshell, Standard Mile Deduction allows you to write $0.575 (for 2015) per mile that you drive for business.  In either case, careful book keeping is required!

Standard Mile Deduction calculates everything (depreciation, gas, repairs, insurance) all into one easy flat rate.  If I drove 10,000 miles for work, I would get a $5750 deduction for that year.

That’s pretty good, but when you see that I’ve actually lost $15k in depreciation alone over 27 months not counting for gas, insurance, maintenance, then you see that $5750 is not a fair value.  So I chose to use the Actual Costs for calculating my deduction.

Actual costs allows me to deduct gas, insurance, maintenance, and depreciation.  Depending on your situation, calculating depreciation can be different.  On a new car purchase where you use the car for over 50% business use, you can take a special Section 179 deduction.

In 2013, I was allowed to deduct up to $11,360 if I used the car for 100% business use.  Now to get the special Section 179 deduction, you must use the car for at least 50% business use.  If it’s less than 100%, you just run your calculations pro-rata.  At 50% business use, you could have deducted 50% * $11,360 = $5,680.

In 2013, I claim this deduction pro-rata on $11,360.  In 2014, I claimed the deduction based on $5,400.  I haven’t filed my 2015 taxes yet, but basically I claimed a deduction on $11,360 + $5,400.= $16,760 of deduction ALREADY.  I only lost $15k in ACTUAL depreciation.  What does this mean?

Depreciation Recapture

So I claimed more depreciation than I actually had on the car, by about $1,760.  Sooooo, unfortunately I’m gonna have to pay back some tax refund I got based on this.  Oh well, at least I got the deduction and paying it back without interest 😀

How much did I save?

Remember how I said business expenses are like buying stuff at 35% off?  Well a rough estimate of my car costs over the last 27 months are:

  • $15,000 depreciation
  • $1900 parking
  • $2000 gas
  • $4600 insurance
  • $1500 maintenance

For a total of $25,000.  Now I didn’t use the car for 100% business use.  I can’t remember the actual amount, but let’s just say 75%.  That means I get to deduct 75% of $25k which is $18,750.  Now I effectively get a 35% off of that and I got to save $6562.50!  I’ll take that 😀

 

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