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what if I told you the ability to write off your car in 2023 using the vehicle tax deduction is the best it's been in over a decade because now you can expense your automobile your SUV your truck your van and so on faster and with even bigger deductions amazing right well there have been some major changes to tax law regarding the vehicle tax deduction that we need to talk about such as bonus depreciation decreasing in 2023 from 100 to 80 percent and increases to the standard mileage rate so this is my updated video on how to write off a vehicle in 2023 tax free okay I'm going to cover two methods for writing off a vehicle critical 2023 tax changes taking effect this year and how owning a business vehicle can overall help you reduce your tax liability hey there I'm Sean with life accounting and taxes the accounting company that helps you save on taxes and build more wealth all right let's go ahead and dive in with number one the two methods for writing off a vehicle now for anyone just getting started with deducting a car let me quickly cover the basics and if you are already familiar then go ahead and feel free to skip ahead using the time stamps down in the description below or tag along for a quick refresher so there are two methods to write off a vehicle number one you have the standard mileage method and this one is popular because you can use it on any vehicle that you own here's how it works okay step one you need to track how many miles you're driving for business and there are several apps that allow you to do this and the one that I like to recommend is called QuickBooks online mobile app since that's the same platform I like to use for bookkeeping as well now the purpose of tracking your business miles is because you as a taxpayer get to write off every mile you drive for business and every year the IRS issues what is called a standard mileage rate and a most recent tax year years that rate has been declining but recently due to inflation in the U.S for 2023 the standard mileage rate has increased to a whopping 65.5 cents per mile and this is why I say it's better than ever to be using the vehicle tax deduction because this is a huge jump compared to the 55 to 57 cents that we're used to seeing so for example if you drive 25 000 business miles in 2023 then at a standard mileage rate of 65 cents per mile you would get a 16 375 dollar tax deduction whereas in 2020 the mileage rate was at 57.5 cents per mile and you only get a 14 375 dollar tax deduction and that's a two thousand dollar difference just based off the mileage rate increasing all right the second method to write off your vehicle is number two using the actual expense method and make sure you keep watching this video because later on I'm going to show you how to choose between the standard method and the actual expense method but first allow me to share exactly how the actual expense method works so works just like it sounds okay you get to take the actual expenses you had on your vehicle and write it off and that would be stuff like your gasoline and fuel your maintenance costs your repair costs your insurance your tires your lease payments if you're leasing your vehicle or take depreciation if you own your vehicle and right there that's something very important to note because at some point you're going to have to decide do I want to lease my business car or do I want to own it now I have a pretty cool video where I'm breaking down the economics between buying versus leasing a vehicle with math and calculations and so I'll link that video at the end of this one in case you're trying to make that same decision for yourself all right now with the actual expense method what you do is tell the IRS when you're filing your tax return what percentage of the vehicle was being used for business was it 100 67 50 what so for example let's say you had actual expenses of twenty five thousand dollars with gas repairs depreciation Etc and you use the vehicle 50 for business and 50 for personal use well in that case your tax deduction would be twelve thousand five hundred dollars okay so those are the two big methods and how the math works now where things get interesting is with the tax cuts and job act which gives small business owners higher annual depreciation limits and bonus depreciation let's talk about that a little bit more number two maximizing the vehicle tax deduction with depreciation I love depreciation because it's one of those tax deductions where you don't have to go out and spend any money in order to reduce your taxable income essentially the tax code allows you to expense the wear and tear of your business assets and under the tcj act the limits by which you can depreciate an asset has dramatically increased and as a business owner your vehicle is an asset now we have to look at things and put them into two buckets if you will okay because the tax law changes if you have an automobile that is under six thousand Pounds versus one that is over six thousand pounds so for cars under six thousand pounds placed in service during 2023 the depreciation limits are as follows twelve thousand two hundred dollars in year one nineteen thousand five hundred dollars a year to eleven thousand seven hundred dollars in year three and six thousand nine hundred sixty dollars a year four to year six however if you have a more substantial tax liability and you want to maximize depreciation then you can elect to take bonus depreciation and that allows you to add an additional eight thousand dollars to depreciation and deduct twenty thousand two hundred dollars in year one which ultimately means if you buy a business card that weighs under six thousand pounds for twenty thousand two hundred dollars then essentially you can buy that car tax free or put another way you can buy a forty thousand dollar business vehicle and get it tax free in two years with bonus depreciation and maybe 300 worth of actual expenses and if you want to see your estimated tax savings on your car purchase then you would take the purchase price and multiply it by your tax bracket for example if you buy a forty thousand dollar car and you are in the twenty four percent tax bracket and that purchase saved you an estimated ninety six hundred dollars in taxes and the best part is the car doesn't need to be new it can be used or a car you already have it just has to be new to your business that being said the numbers I just went over assume 100 business use if the car drops below one hundred percent then the dollar limits are reduced proportionately and remember this applies the vehicles that you own not the ones you lease okay you cannot take the appreciation on a lease vehicle okay now does all of this make sense if you have any questions make sure you leave a comment down below also I know taxes can be confusing and difficult to manage for many people but our team is here to help if you have an operating small business and you would like assistance with tax planning or tax preparation then click the link down in the description below to learn a little bit more about what we do while we're still taking clients all right let's go ahead and move on to number three and talk about Section 179 and bonus depreciation for heavy Vehicles so trucks SUVs RVs and other automobiles with a gross vehicle weight rating of over six thousand pounds they play by a different set of tax rules and one of those special tax codes is called Section 179 for vehicles that weigh between six thousand pounds to fourteen thousand pounds you are able to take a first year tax deduction of twenty five thousand dollars and during the 2023 tax next year Section 179 allows businesses to write off up to 1 million one hundred and sixty thousand dollars of depreciable assets that were purchased during the tax year which means just by having a truck or a sprinter weighing over 14 000 pounds or special utility you're able to write off the total cost in year one of course as long as the cost is under 1.1 million dollars which I can't think of any vehicles that cost that much and the vehicles can be used they can be new they can be financed by a bank or dealership it doesn't matter okay now here are some very special notes you want to write down if you plan on using Section 179 for starters businesses must show a profit or positive income at the end of the tax year you cannot use this to put you in a business loss also vehicles must be purchased and placed in service by your business by December 31st of the tax year you wanted applied to specifically the gross vehicle weight rating or or GVWR must be over six thousand pounds and most automobile manufacturers have this information readily available on their website and these vehicles must be used more than 50 percent for business activities now those are important things to know and things you can elect to do yourself or stuff your accountant should know how to do as well now what if you plan to purchase assets over the Section 179 limit like maybe you asked me hey Sean I plan on starting a Toro business Fleet and I'm going to purchase 12 heavy business cars at a hundred thousand dollars a pop what should I do well in that case your assets will cost 1.2 million dollars in Section 179 will cover one million one hundred and sixty thousand dollars so what about the rest well here's where bonus depreciation comes into play for heavy Vehicles because bonus depreciation allows you to deduct a specific percentage now the bad news is is bonus depreciation has started to decline going from 100 percent in 2022 to 80 percent for 2023 and it will continue to drop to 60 percent in 2024 40 in 2025 and 20 in 2026 unless it is renewed or extended however what we're able to do for our clients is combine Section 179 with bonus depreciation so going back to our example from earlier if a fleet of vehicles cost 1.2 million dollars in Section 179 gives you a one million one hundred and sixty thousand dollar tax deduction then the difference will be forty thousand dollars and we can take eighty percent of that for bonus depreciation of thirty two thousand dollars giving a total first-year tax deduction of one million one hundred and ninety two thousand dollars only eight thousand dollars off from two million dollars so not completely tax free but pretty darn close right now here's some extra notes for bonus depreciation on heavy Vehicles good news is businesses do not have to show positive income though Vehicles still must be driven 50 for business and there is no maximum amount or no limit on the purchases like there is on Section 179 so Section 179 and bonus depreciation allow you to maximize writing off your vehicle but do you really need to maximize it let's talk about that a little bit more in the fourth part of this video number four standard mileage versus the actual expense method the method you decide to use is largely going to depend on many factors like your taxable income that type of vehicle you use for business the weight of it and many other variables and it can get pretty complicated pretty quickly but I want to run some scenarios by you okay scenario number one if you drive 50 000 business miles and the car costs thirty thousand dollars should you use the standard method or the actual expense method well the standard method wins because fifty thousand business Mouse gives you a thirty two thousand seven hundred and fifty dollar tax deduction in 2023 and even if you could expense the entire purchase in year one because we know the vehicle needs to be over six thousand pounds it still wouldn't beat that thirty two thousand dollar tax deduction so if you plan on driving a lot of business miles and the vehicle costs are pretty low then the standard mileage method will likely win okay scenario number two if you drive five thousand miles for business and the car costs fifty thousand dollars what method should you use well as long as you use the vehicle fifty percent or more for business then you should consider releasing it with the actual expense method because since the miles are so low and the costs are so high it may make more economic sense to lease it instead of buy it okay what about scenario number three let's say you have a family car that you also use for business purposes on occasion like you use it to drive to business business meetings which methods should you use in that case well actually you have to use the standard mileage method because the uses is less than 50 percent and you wouldn't qualify for the actual expense method but hey every deduction still matters and use that standard mileage deduction if you need to and last scenario number four let's say you need to buy a new SUV for business which method should you use well in this case it makes a lot of sense to consider the actual expense method because you can take bonus depreciation you can use Section 179 to see massive tax savings in year one now I personally use the standard mileage method because I'll be honest I don't drive much for business because usually I'm stuck behind the camera recording YouTube videos or managing my businesses on my laptop I do everything remotely but hey I still take every mile that I can get alright so we always get asked a lot of questions around this deduction so I want to try to answer some frequently asked questions with number six some important notes in FAQs so first off of course the key thing with both methods is that you must be self-employed or own a business unfortunately tax law does not allow individuals to write off any Vehicles next you need to know writing off a vehicle isn't the same thing as writing off your business travel expenses that would be things such as expensing your airfare your hotels your Ubers your parking your rental cars and so on which by the way if you'd like to see me make a video on how to deduct your travel expenses just leave a comment down below okay another important note which is critical okay regardless of which method you decide to use you should always be tracking your business mileage you can do everything right but in the event of an audit if you are not able to substantiate your tax deduction then you could have your production reclassified as income and we definitely don't want that so as I mentioned earlier make sure you're tracking your business mileage using something like QuickBooks online mobile app and I'll link that down below also with Section 179 your deduction cannot exceed your annual net taxable income so having a huge deduction won't give you a bigger tax refund or something like that now here's one more important note which is depreciation recapture can wipe away a lot of your tax savings and be reclassified as ordinary income if you sell your vehicle for a gain this happens when you sell an asset that exceeds the adjusted cost basis so for example if you fully depreciate a car with a price of fifty thousand dollars and then you sell it or even trade it in for a value of fifteen thousand dollars then you would have to recognize a gain of fifteen thousand dollars as taxable income all right so that's my updated video on how to write off a car in 2023 you should leave knowing there has been several improvements to tax code such as higher mileage tax rates higher annual depreciation limits and there are still ways to write off a vehicle 100 percent tax-free even with depreciation dropping to 80 percent so if you enjoyed the video I hope I earned your like make sure you like the video for the algorithm and make sure you subscribe for more great content coming up next I have two more videos you may enjoy as well so check those out if you haven't already and I'll see you over there