Is buying a new car tax deductible 2022?
Is Buying a Car Tax Deductible in 2022?
In the early days of the pandemic, car buyers slowed their purchases due to the uncertainty of the times or the fact that working from home meant less driving. The result of the past two years has been an automotive industry that was hit hard by supply and demand issues — first by shutdowns, and then by microchipping shortages. As commuting to the office resumes, you might be considering purchasing a car – and if you use it for business or personal use – whether you can make that purchase tax deductible. Here’s what to know.
The average price for a new car hit just over $47,000 in December 2021 according to Kelley Blue Book. While that number would have seemed unfathomable just a few years ago, the pandemic and supply chain issues only exacerbated the problem leading to rapid price increases. In 2019, the average car price in the U.S. rose by about $1,800; by 2021, that number rose to about $6,200.
Buying new or used?
While prices are slowly decreasing from their December peak, it’s an expensive time to buy a big ticket item like a car — even if it’s used. The average price of a used car – of which there’s more supply than new – still rose 29% year over year as of January 2022. Buying a new car may not be the best financial decision due to depreciation, but even buying a used car means factoring in things like insurance, warranties, and possible loan payments. If you absolutely can’t wait to buy a car, make sure to research as much as you can to find an affordable option.
What is tax deductible for vehicles?
While you can’t write off the entirety of the purchase price for a new or used vehicle, unless you own and operate a business, you do have options available for tax purposes. Here are a few examples.
Vehicle Sales Tax
If you itemize, you can take either the income tax deduction or a general sales tax deduction, but you can’t take both. The vehicle sales tax is added to the sales tax deduction. You’ll also have to consider whether itemizing or taking the standard deduction results in a greater tax benefit to you — this should be discussed with your tax and financial advisors.
Standard Mileage Rates
You can deduct standard mileage rates if your car is used for business, charitable, medical, or moving purposes. The following are the standard mileage rates for 2022:
- 58.5 cents per mile driven for business use
- 18 cents per mile driven for medical, or moving purposes for qualified active-duty members of the Armed Forces
- 14 cents per mile driven in service of charitable organizations.
Actual Car Expenses
If you don’t use the standard mileage rate, you may be able to deduct actual car expenses, which include things like depreciation, registration fees, repairs, parking fees, and more. If your car usage is split between business and personal use, you can only deduct that portion which is used for business purposes.
Purchasing Vehicles in 2022
There are many tax considerations when buying a new or used car, either for business or personal use. If you’re considering purchasing a vehicle in 2022 and have questions about the tax implications, deductions, or credits for vehicles in California, contact us. We can discuss your options and figure out the best path for tax savings in your car-buying experience.
The Team at Chatterton & Associates
Although the information has been gathered from sources believed to be reliable, it cannot be guaranteed. Federal tax laws are complex and subject to change. This information is not intended to be a substitute for specific individualized tax or legal advice. Neither Royal Alliance Associates, Inc nor its representatives provide tax or legal advice. As with all matters of a tax or legal nature, you should consult with your tax or legal counsel for advice.
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Does My Vehicle Qualify for Section 179 Deduction?
Buying a car is a huge expense, but we do it because we use them for everything. So much of our lives is lived behind the wheel, driving to work or classes, getting the kids to their games, going on dates or heading out on a road trip. When you think about it, our cars are really there for a lot of both the big and small moments in our lives. That’s why we sometimes decorate them with bobbleheads on the dash or tassels hanging from the rearview mirror. Some of us even give our car a name.
If we want our cars to last a long time, the cost of maintenance and parking is significant. The good news is that Section 179 of the IRS allows you to deduct the cost of certain types of property on your income taxes as a business expense.
As a self-employed worker, freelancer or independent contractor you can claim tax deductions for your driving expenses that can substantially lower your taxes. If you own a car and use it for business purposes, you can deduct mileage and car-related expenses as a business deduction. Aside from claiming the mileage and maintenance tax deduction, you can also deduct your vehicle costs with Section 179.
Say you bought a car to drive for Uber. You can start deducting maintenance costs like oil changes, part of your cellphone bill, your subscription to Spotify for playing music for customers, parking and tolls – and a whole lot more.
- Vehicle-related expense can be deducted if you use your car for work
- You can deduct the amount your car has depreciated
- You can take a standard deduction based on mileage or itemize all your vehicle expenses
What vehicles are covered by Section 179?
Section 179 was introduced as a federal incentive for small and midsize businesses, it includes vehicles that meet certain requirements, such as:
- Pickups and vans that are used for business more than 50% of the time and exceed 6,000 pounds gross vehicle weight. These vehicles may qualify for at least a partial Section 179 deduction, plus bonus depreciation.
- Vehicles that are used for work and cannot double as personal vehicles, such as forklifts or trailers, or those that seat more than nine passengers behind the driver’s seat such as hotel or airport shuttle vans.
- Delivery-type vehicles, such as cargo vans or box trucks with no passenger seating.
- Specialty work vehicles such as hearses or ambulances.
Section 179 deduction vehicle list for 2022
- Audi Q7
- BMW X5, X6
- Buick Enclave
- Cadillac XT5, XT6, Escalade
- Chevrolet Silverado, Suburban, Tahoe, Traverse
- Chrysler Pacifica
- Dodge Durango, Grand Caravan
- Ford Expedition, Explorer, F-150, and larger
- GMC Acadia, Sierra, Yukon
- Honda Pilot 4WD, Odyssey
- Infiniti QX80, QX56
- Jeep Grand Cherokee
- Land Rover Range Rover, Discovery
- Lexus GX460, LX570
- Lincoln MKT AWD, Navigator
- Mercedes-Benz G550, GLS, GLE, Metris, Sprinter
- Nissan Armada, NV 1500, NVP 3500, Titan
- Porsche Cayenne
- Tesla Model X
- Toyota 4Runner, Landcruiser, Sequoia, Tundra
Are there any changes made to the Section 179 deduction in 2022?
Yes. There are some changes including the deduction limit is
Changes to Section 179 Deductions 2022 $1,080,000, the spending cap on equipment purchases is $2,700,000 and the bonus depreciation is 100% for 2022.
There are caps to the total amount you can write off ($1,080,000 for 2022) and limits to the total amount of the equipment purchased ($2,700,000 in 2022). The deduction begins to phase out on a dollar-for-dollar basis after $2,700,000 is spent by a given business (thus, the entire deduction goes away once $3,780,000 in purchases is reached), making it a deduction that is truly for small and medium-sized businesses.
How does depreciation work under Section 179?
Depreciation refers to the annual deduction authorized to recover the cost or other basis of business or investment property having a useful life substantially beyond the tax year. Generally, depreciation starts when you first use the property in your business or for the production of income. It ends when you take the property out of service, deduct all your depreciable costs or no longer use the property in your business or for the production of income.
However, with the Section 179 deduction, you can write off the entire cost of the purchase in the first year, rather than depreciating it over its functional life.
The cost of that car you bought to drive for Uber can all be written off in your first year of driving customers around.
Where should I report Section 179 deduction?
As a business owner, gig worker, or self-employed person, you must use Form 4562 to report your Section 179 deductions.
Standard Mileage vs Section 179 deduction
If you drive a lot for work, then you have two options for deducting your vehicle expenses — the standard mileage deduction or Section 179 deduction.
The IRS allows you to deduct the average costs of operating your vehicle, as well as depreciation, when choosing the standard mileage rate. In 2022, the standard mileage deduction rate increased to 58.5 cents per mile.