Taxing Vehicles: Business and Personal

The ads are everywhere. “Walk in with your W-2, drive out with a new car,” or some variation on that theme. But before walking in, a little thought is in order.

“We find a number of people who get in trouble when they expect a certain amount and they don’t get that amount,” Mike Cherry of the Consumer Credit Counseling Services told KOLR 10.


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John David Murray, owner of Advance Tax agrees, telling the Shreveport Times “When you file your taxes, it’s not necessarily a guarantee of a refund. Even with losses this year there’s no guarantee. Since you’re claiming a loss on what you did last year, and you’re finished with last year, taking a loss against that would result in a refund. There wouldn’t necessarily be a refund this year.”

The potential variation in the amount of the refund isn’t the only tax implication of buying, owning or leasing a vehicle.

Publication 463: Travel, Entertainment, Gift and Car Expenses details the tax implications of having a vehicle. If the vehicle is used both for personal and business purposes, expenses are divided based on the miles driven for each purpose. In general, expenses incurred while using a vehicle for business, other than for commuting to and from home and a primary business location, are generally deductible. Changes affecting tax returns for 2005 include the standard mileage rate (40.5 cents per mile from January 1 through August 31, 2005 and 48.5 cents per mile between September 1 and December 31, 2005) and a decrease in the amount of depreciation that can be deducted for vehicles first placed in service during 2005.

Section 179 allows the deduction of all or part of the business cost of a vehicle as a current expense rather than depreciating the value over a number of years as long as it is used for business more the half the time. There are limits to the section 179 deduction. The total amount that can be deducted under section 179 generally cannot exceed $105,000, however, the deduction for sport utility and certain other vehicles placed into service during 2005 is limited to $25,000 and the deduction for a qualified car placed in service in 2005 is $2,960.

If the vehicle used for business is leased rather than purchased, the standard mileage rates still apply. In addition, part of each lease payment is deductible, but if the lease is for more than 30 days, the lease payment deduction may need to be reduced by an “inclusion amount”. As with expenses, the lease deduction does not apply for personal use of the vehicle.

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