Whether you drive a van to your catering jobs or a truck to construction sites, owning and maintaining a vehicle is going to be a considerable expense. No wonder that most business owners in your position wonder can an LLC write off a car purchase. 

If you’re self-employed through an LLC and need to use a vehicle for business, you’ll likely be able to treat it as a tax-deductible business expense and write it off. Let’s go through the steps you need to take in order to benefit from this tax advantage.

Understanding How an LLC Can Write Off a Car Purchase

The IRS allows individuals who own a business or are self-employed and use their car for business to deduct related vehicle expenses on their tax return. This eligibility criteria includes sole proprietors, members of LLCs, S Corporations, and any entity that has an income pass-through tax classification. 

They’re required to disclose details about the vehicle used on Form 1040. However, if the car is used for both personal and business purposes, the expenses have to be split. In that case, the allowed deduction is based on business mileage. No deduction can be claimed on the personal use mileage.

What Are the Requirements for an LLC to Write Off a Car Purchase?

If you’re looking to write off a car purchase for your LLC, you’ll need to demonstrate to the IRS that the vehicle is used for business travel and it’s essential for the operations of the company. For example, you may need a car to attend client meetings, deliver products, visit job sites, etc. Whatever purpose you use the car for, it should tie back to the business.

Do keep in mind that your LLC can’t write-off these expenses if you use five or more cars. That’s because the IRS considers them to be a fleet and doesn’t provide a tax benefit beyond that. Employees who are not the business owner can’t claim write offs for business vehicles as well.

Not everyone will be able to have separate business and personal vehicles, particularly small business owners. There will be times when they use it for personal reasons as well. The IRS doesn’t allow car expense deductions if the vehicle is used for purposes such as leisure trips, vacations, etc. Even the commute from your home to your workplace doesn’t qualify as business mileage.

How Can an LLC Prove That a Car Is Used for Business Purposes?

There are several ways that as a business owner you can justify the business use of your vehicle. It’s important to be mindful of this since if you ever end up being audited, you’ll need to demonstrate in no uncertain terms that whatever you’ve claimed as a deduction is legitimate. This will require you to be particularly diligent with your recordkeeping. 

For example, you should retain the receipts from the gas station to justify fuel expenses. Keep documentation such as mileage logs and business appointment calendars to show when, where, and how many miles the car was driven for business travel. Any expense incurred on insurance, general repair and maintenance, tire replacement, tolls, etc. will also help prove that the car is used for business.

What Are the Restrictions on the Types of Vehicles an LLC Can Write-Off?

Section 179 is the relevant internal revenue code for LLC car write-offs. It allows for an immediate expense deduction that business owners can take for the purchase of depreciable business equipment. By utilizing this section, the LLC can write off the entire purchase price of the car.

There aren’t many limitations as to which cars can be treated as a write-off under this section. Any four-wheeled vehicle that has been designed to carry passengers, such as vans, trucks, or cars, can be a write-off. SUVs that weigh between 6,000 and 14,000 pounds qualify for partial deduction under Section 179.

It must be a new vehicle or a vehicle that’s “new to you.” It must also be placed in service before December 31 of the year in which you’re going to claim the deduction.

Can an LLC Deduct the Full Cost of a Car Purchase?

An LLC can deduct up to the full purchase price of a car but there are several factors to consider. To be eligible for the Section 179 deduction, the car must be used for business purposes more than 50% of the time. However, the cost of the car is typically subject to depreciation rules and the IRS only allows for a portion to be deducted each year. 

Depreciation refers to the gradual reduction in the value of a business asset over time. Based on this, the car’s total cost can be spread out over multiple years based on its depreciation rate. The IRS has set limits on annual depreciation for vehicle write-offs based on the car’s value and year of purchase. 

Any vehicle with a gross vehicle weight rating of under 6,000 pounds has a Section 179 tax deduction limit of $12,200 in the first year of use. An additional $8,000 of Bonus Depreciation can also be claimed for a total deduction of $20,200 in 2023.

For heavy vehicles that have a gross vehicle weight rating of 6,000 pounds and not exceeding 14,000 pounds, the tax deduction limit is $28,900. 80% Bonus Depreciation is also allowed on these vehicles.

A full deduction, i.e. a complete write-off, can only be taken for cars that are used for business purposes 100% of the time. As long as the car is being used 50% for business, with periodic personal use, you can claim half of the allowed Section 179 tax deduction limit. So for a vehicle weighing less than 6,000 pounds, this would be half of the $12,200 limit allowed in the first year, or $6,100.

Other Expenses an LLC Can Deduct for a Car

In addition to writing off a portion or the entire purchase price of a car, an LLC can also deduct actual vehicle expenses incurred for the use and maintenance of the vehicle. These expenses may include, but aren’t limited to, fuel costs, insurance premiums, oil changes, general maintenance and repairs, interest on vehicle loans, registration fees, etc.

Keep in mind that the LLC needs to justify all the expenses that it’s going to deduct. The best way to do that is to keep detailed records of all relevant spending. Keep all the invoices, receipts, mileage logs, and even parking tickets safe. In the event that you’re required to produce evidence of these deductions, you’ll have all the paperwork on hand to make a compelling case. 

Figuring Out Deductions Can Be Confusing – doola’s Here To Help

It can be a bit confusing to figure all of this out, particularly if it’s not going to be a straightforward deduction and you’re going to be using the vehicle for both business and personal reasons.

The experts at doola’s business formation services can help you through every step of the process, from incorporating your LLC to managing tax compliance. Reach out today and find out more about how we can help make this process easy for you.

FAQs

Can an LLC claim the standard mileage rate instead of deducting actual expenses?

An LLC must use the standard mileage rate in the first year that the vehicle is used for business. In subsequent years, it may choose to use the standard mileage rate or the actual expense method.

Can an LLC write off lease payments for a car?

A car lease is included in the list of eligible vehicle tax deductions by the IRS, so an LLC to write off lease payments made for a car that’s partly or fully used for business purposes.

Can an LLC claim a car purchase as a Section 179 deduction?

An LLC can claim a car purchase as a Section 179 deduction, provided that the car is used at least 50% of the time for business reasons. If the car is 100% used for business, the maximum allowable deduction may be claimed under Section 179.

What happens if an LLC sells a car that was previously written off?

First, you need to determine if you made a profit or a loss on the sale of the car. If you make a profit, you will have to pay income tax on it. If you lost money on the sale, you can deduct the loss from your taxes.

What are the consequences of incorrectly claiming car expenses as an LLC?

If the IRS finds that the deductions were claimed incorrectly, it may levy significant penalties, up to one-fifth or more of the disallowed amount. There may even be the possibility of criminal prosecution, depending on the severity of the offense.

Adnan Farooqui
Adnan Farooqui
Content Specialist
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