Using a car for business purposes got more favorable under the new tax law.
Starting in the year 2018, self-employed freelancers can deduct up to $18,000 in the first year that they utilize a car or truck for business purposes. By comparison, in the year 2017, the most that a freelancer can claim for first year depreciation on a car or truck is limited to $11,160. So the increase in this deduction amount is a significant improvement.
Remember, the remaining cost of the car (over what the freelancer can deduct in 2018) is potentially deductible in future years.
Both New and Used Cars Qualify for the Higher Maximum
Pre-owned cars qualify for the deduction too. And here’s where it gets really interesting from a tax planning perspective.
It used to be that you needed to buy a new car to get the maximum depreciation deduction.
Congress relaxed the requirements to allow both new and used cars to qualify for the maximum deduction. But here’s the thing. A freelancer does not have to buy a new or used car, and then start using that car for business purposes. The freelancer could take the car they already own and start using the car for business purposes.
Smaller Maximum if Car is Driven Less than Half the Time for Business
Of course, to get the maximum deduction, a car or truck needs to be used 100% of the time for business purposes. The deduction will be prorated if the vehicle is used partly for business and partly for personal use. And if a vehicle is used for business purposes less than 50% of the time, then freelancers take a smaller maximum amount of $10,000 depreciation (prorated for the percentage of business use).
Mileage Log Needed to Prove You are Driving for Business
To claim depreciation on a car or truck, a freelancer needs to prove that they actually drive the vehicle for business purposes. Accordingly, we advise freelancers to keep a log of all miles driven for business. The vehicle log should document four items:
- the beginning and ending odometer readings for each business trip;
- the business purpose of the trip, such as to visit a client or deliver goods;
- the destination; and
- the date of the trip.
Andrew is a nature photographer and travels frequently to national parks to shoot pictures for magazines and documentaries. In January 2018, he starts using his truck to travel to his photo shoots. He drove his truck for 7,000 miles for various photo shoots and 3,000 for personal use. Thus, his business use percentage is 70%. The cost of his truck was $25,000. Andrew could claim a depreciation deduction for $17,500 (which is 70% of $25,000). For a freelancer with about $100,000 of self-employment income, this would result in tax savings of approximately $6,700.
In this example, Andrew deducts the entire cost of the vehicle, as it relates to business purposes, in 2018. Andrew will not qualify for any depreciation deduction in 2019. However, if Andrew was able to increase the business use percentage to more than 70% in 2019, then there could be additional depreciation deductions he could claim.
In fact, Andrew’s example is a bit of an anomaly. We rarely see instances where a client can deduct the entire cost of a car or truck in the first year. This unusual result is brought about because Congress increased the maximum amount of first-year depreciation on vehicles.
Andrew can deduct operating expenses in addition to depreciation. Operating expenses include the cost of fuel, oil changes, repairs, vehicle license and registration fees, and insurance.
Alternatively, Andrew deduction using the standard mileage rate. For 2018, the standard mileage rate is 54.5 cents per mile. This standard mileage rate already factors in depreciation. Andrews could claim a deduction of $3,815 for car expenses (that’s 7,000 miles multiplied by 54.5 cents per mile). Andrew’s deduction using actual depreciation results in a much higher deduction in 2018, and which most likely results in the least amount of tax for the year.
- The Tax Cuts and Jobs Act increased the maximum amount freelancers can deduct for depreciation on cars and trucks driven for business purposes.
- This depreciation deduction is in addition to any expenses for operating and maintaining the vehicle, such as the cost of fuel, registration and license fees, insurance, and repairs.
- We recommend that freelancers always record their business trips in a mileage log.
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