Buying a new car can be an effective way to keep yourself and your family safe when traveling to work, school or anywhere else. However, you may not be aware that there are situations when you can write off the interest that you pay on your car loan. This may be possible if you use the car for business purposes.
You Don’t Have to Use the Car Exclusively for Business
Those looking to both advance their career and save money on their taxes may be able to accomplish both with a new car. Even if you use the car for personal reasons, you can still write off a portion of the interest paid on an auto loan if it is also used for business purposes. For instance, if 50 percent of the miles accrued on your vehicle in a given year were to deliver your baked goods to customers, you would qualify for write-off of 50 percent of the loan interest.
You Do Have to Itemize Your Deductions
The IRS requires that you itemize at online tax return any deductions related to your vehicle if you wish to write-off interest on a car loan. Furthermore, you must elect to itemize in the year that you buy the vehicle. If you choose to take the standard mileage deduction in the first year that you use the vehicle, you must use that method for as long as you own the vehicle.
What Type of Loan Is Eligible for the Interest Deduction?
You are allowed to deduct the interest from a loan whenever the money is used for business purposes. Therefore, as long as you itemize your vehicle deductions, it generally doesn’t matter what loan type is used to finance the purchase. This means that it may be possible to use an auto equity loan to buy a vehicle for your business. Some business owners may benefit twice because equity loans tend to come with lower interest rates, and you get to deduct the interest, which helps your business lower its transportation costs.
What Happens If You Lease Your Vehicle Instead?
If you lease a vehicle, you don’t technically pay any interest when you make your payment each month. However, if you decide to purchase the vehicle at the end of the lease term, you could then deduct any interest paid on the loan assuming that all other criteria is met. Those who decide to lease may be able to deduct the full amount of a lease payment if the vehicle is used solely for business purposes.
How Do You Know How Often a Vehicle Is Used for Business Purposes?
As with anything relating to your small business, it is important to keep good records. If the IRS tries to dispute your allocation between business and personal use of a vehicle, you can use your mileage log to provide a good faith basis for your determination. You should also make sure to keep track of tolls paid and any gas purchased while driving to business meetings or other professional events.
Buying a vehicle for business purposes may make it easier to make sure that you have what you need to better meet the needs of your customers. If you have any questions as to the tax implications of doing so, it may be a good idea to talk with a financial expert or a tax attorney in your area.