Vehicle Purchase

Congrats on the new to you vehicle.  There are two different ways you can expense this truck.  The very first year that you placed this truck in service is very important.  You can take the standard mileage rate per business mile.  The standard mileage rate includes depreciation of the truck, repairs and gas.  It is a fixed amount set by the IRS.  The standard mileage rate for 2023 is 65.5 cents per business mile.

The other way is to take actual expenses.   When you take the actual expenses you get to claim depreciation of the truck, actual cost of repairs, gas, and insurance based on the business portion that you use the truck. 

For example, if you drive the truck 1000 total miles in the year and 900 of those miles are for business, you will get a deduction of 90% of your actual cost. 

If you choose to use the actual expenses, you must continue to claim actual expenses each year the truck is used for your business.

You can also deduct the interest paid on the truck loan on the business portion.

Hi There:

1. Can you explain the ins and outs of the vehicle purchase as a business expense?  The IRS allows a vehicle deduction for all ordinary and necessary vehicle expenses as long as you are self-employed and not a W2 employee.

2. How do I take that deduction?  You have the choice of the standard mileage rate which in 2023 is 65.5 cents for every business mile driven or actual expenses incurred for the business which will be claimed with Turbo Tax - Self Employment - Schedule C - Vehicle Expenses.

3. Expert tips, tricks, + insider knowledge will be very appreciated Assuming business use of at least 50% for the vehicle, many new vehicle owners elect the actual method of vehicle expenses in order to take advantage of accelerated depreciation on the vehicle, which could greatly increase the vehicle deduction.

The above answers assume you are a disregarded entity (sole prop or single member LLC reporting your business on schedule C).  If this is a multimember partnership or S-corporation, and you are using your personally owned vehicle for business, things get a little more complicated.

Assuming you are a sole prop or single member LLC, and the vehicle is used 100% for business, then you can use the standard mileage method or the exact expense method.  If you use the standard mileage rate in the first year, then in future years you can change between standard mileage and exact expense.  If you use the exact expense method the first year the vehicle is placed in service, you must always use the exact expense method.  

All the rules are in chapter 4 here.

https://www.irs.gov/forms-pubs/about-publication-463

Note that your loan interest is a deductible business expense no matter which method you use to deduct the actual vehicle operating expenses. 

Some thoughts on depreciation.   Depreciation is an allowance for wear and tear.  If you use the exact mileage method, you will depreciate the vehicle over 5 years.  That means even though you spent $35,000 this year, you only deduct roughly $7000 per year as a business expense.   You may qualify for section 179 depreciation, which would allow you to deduct the entire $35,000 in year 1.  However, if you stop using the vehicle for business in less than 5 years, you will have to repay some or all of the depreciation you claimed.

The standard mileage rate includes an allowance for depreciation of 27 cents per mile.  The trick is, if you use the standard mileage method, you can get the benefit of that depreciation allowance even after the vehicle is fully depreciated.  Suppose you keep this truck for 10 years.  You can fully depreciate it in year 1 under section 179, or over 5 years under normal deprecation, but for the last 5 years, you get no benefit from depreciation.  However, suppose you drive this truck 20,000 miles per year and use the standard mileage method.  Over 10 years you will claim $54,000 of depreciation as a business expense even though you only paid $35,000.  Obviously, it depends on the mileage you expect to drive and how long you expect to use the vehicle for business.  But if you drive the vehicle far enough, the standard mileage method may have advantages in the end, even though you can't depreciate as much up front.