Can I write off my car payment?
Are you self-employed or a small business owner and wondering if you can write off your car payment. Read this article for a definitive guide about how to write off your car payment.
Many self-employed individuals, such as freelancers, gig workers, delivery drivers, realtors, graphic designers, etc., use their cars nearly all day for work.
As a result, many independent contractors ask themselves, can I write off my car payment?
Or, can I write off my car as a business expense?
This often leads them to assume they can write off their car loan payments or car lease payments from their taxes, including their income taxes. However, the entire car payment is typically not tax-deductible. In addition, there are a variety of scenarios that affect the amount of a self-employed car payment write-off.
Continue reading this article to learn about each of these scenarios.
Related: Self Employment Tax Write Offs: The Complete List
Can I deduct a personal car I financed?
This is a scenario where you use your personal car for work, and you financed your personal car with a personal car loan. This is the most common scenario.
Most delivery drivers and other 1099 contractors that drive for work use their personal car for work. Meaning, when they do their income taxes they attach an IRS Schedule C to their income tax return. On their Schedule C, self-employed individuals report their profit and losses and business expenses from their self-employment work.
In this case, you can’t write off your car payment as a business expense.
What part of my car payment can I write off as a business expense?
Independent contractors and self-employed individuals that use their car for work can write off their car loan interest.
Your car loan interest is considered a car-related expense.
Car loan interest is a car-related expense just like gas and car repairs and other car-related expenses.
However, there’s a catch.
How much of my car loan interest can I write-off?
This is the catch.
You can only write off the portion of your car loan interest that represents the portion of the time you use your car for work. In addition, the calculation of the proportional business use of your car loan interest rate only applies if you’re using the Actual Expense Method (more on that later).
The IRS offers two methods to deduct business use car expenses.
- Actual Expense Method
- Standard Mileage Method
We go over these two methods, and which one is best for you, in a later section of this article, called, How can I write off my car as a business expense?
So keep reading, or scroll ahead to read it now.
Sample car loan interest write off calcultion
For example, if you use your personal car 30% of the time for work and 70% of the time for personal use you can deduct 30% of your car loan payment from your taxes.
Let’s do the math and see what that looks like.
Let’s say your car loan interest is $500 for the year.
Also, let’s assume the same propitious are mentioned above. You drive your car 30% of the time for work, and 70% percent of the time you drive your car for personal reasons. Personal reasons, for example, going to the grocery store, picking up the kids, you get the picture.
$500 x 0.30 = $150 car loan interest tax deduction
This means you can deduct from your taxes $150 of the $500 a month you pay in car loan interest. Of course, the amount for each person may vary, and the amount of car loan interest you pay may vary from month to month.
So make sure you do your calculations with the correct amount.
Again, please note that this calculation only applies if you are using the Actual Expense Method.
If you’re using the Standard Mileage Method you will deduct your car loan interest differently. For more information on the two IRS car deduction methods scroll down to the section, How can I write off my car as a business expense?
Can I deduct a car I financed through my business?
Let’s say you do all of your independent contractor and freelancer business work through an LLC. In addition, you financed your car through your business.
This would mean that your car loan is in your business’s name. Therefore, you make your car loan payments through your business account.
In most cases where a self-employed individual or freelancer has financed their car through their company, they are using this vehicle 100% of the time for business purposes.
In this case, you can write off 100% of your car loan interest on your taxes. Again, this is assuming you’re using this vehicle 100% of the time for business purposes. In addition, this car loan write-off method applies only if you’re using the Actual Expense Method.
Scroll down for a complete overview of the Actual Expense Method vs the Standard Mileage Method.
Do you need to get approved for a small business loan?
Check out this article if you answered yes, How to Get Approved for a Small Business Loan.
What are the different types of business loans (a complete comparison)?
Business Loan versus Personal Loan
Can I write off my car insurance?
Under the Actual Expense Method, you can write off car insurance from your taxes.
Can delivery drivers write off car payments?
The same rules apply for writing off car payments for delivery drivers as they do for other independent contractors or self-employed that finance their car through a business entity.
- You can only write off your car loan interest.
- The portion of your car loan interest you can write off is directly proportional to the amount of time you use your car for work purposes.
Please review the rest of this article for full details about how to write off car payments. What part of your car payment you can write off. And more details. All of the same rules apply to delivery drivers as other independent contractors or small business owners.
How can I write off my car as a business expense?
The IRS gives you two options for writing off car expenses.
In this section we will go over each and when it’s best to use one over the other.
So keep reading!
We already went over one of those methods above, the Actual Expense Method, and provided a sample calculation for car loan interest payments.
We will do that again here as well just in case.
The two IRS methods for writing car expenses are:
- The Actual Expense Method
- The Standard Mileage Method
For both methods, you will calculate a total vehicle deduction amount, which you will enter on the Schedule C form you attach to your tax return.
How to write off car loan interest with the Actual Expense Method?
What is the Actual Expense Method?
The Actual Expense Method requires you to add up all of the actual expenses you spent on the operation of your car to determine your car write-off amount.
To use the Actual Expense Method you need to first determine the percentage of time you use your car for work. Some freelancers, only use their car 30% or 50% of the time for work. Other independent contractors and self-employed, use their cars 100% of the time for work.
To write off car loan interest using the Actual Expense Method you first need to calculate the portion of your car loan interest based on the amount of time you use your car for work purposes. You don’t need to do this calculation if you use your car 100% of the time for work.
Sample car loan interest write off calcultion
For example, if you use your personal car 40% of the time for work purposes and the rest of the 60% of the time for personal use you can deduct 40% of your car loan interest.
Let’s do the math to see what that looks like.
Let’s say your car loan interest is $250 for the year.
Also, let’s assume the same propitious are mentioned above. You drive your car 40% of the time for work, and 60% percent of the time you drive your car for personal reasons. Personal reasons, for example, going to the grocery store, picking up the kids, you get the picture.
$250 x 0.40 = $100 car loan interest tax deduction
This means you can deduct from your taxes $100 of the $250 a month you pay in car loan interest. Of course, the amount for each person may vary, and the amount of car loan interest you pay may vary from month to month.
After you’ve determined the amount of your car loan interest write off you would write it off this business expense by adding the total amount you calculated to your Schedule C that you attach to your 1040 personal income tax return. This way of writing it off applies if you’re an independent contractor that uses your personal car for work that you financed with a personal car loan.
Small business owners that financed their car through their business would write off their car loan interest deduction through their LLC tax return.
What car expenses can I deduct from my taxes?
Using the Actual Expense Method, the IRS allows you to deduct the following car-related expenses from your taxes:
- Gas and oil
- Maintenance and repairs
- Registration fees and taxes*
- Vehicle loan interest*
- Rental or lease payments
- Garage rent
- Tolls and parking fees*
*The stared car-related expense items are included in the Standard Mileage Method.
How to write off car loan interest with the Standard Mileage Method?
What is the Standard Mileage Method?
The Standard Mileage Method for your car write-off is calculated by multiplying a per-mile amount published each year by the IRS known as the Standard Mileage Rate. This method is a simple way to calculate the business use of your car tax write-off. Instead of itemizing each actual car expense, you simply keep a record of the mileage you drove for the year.
The Standard Mileage Rate is a number created by the IRS each year, and it takes into consideration economic factors such as inflation and the price of gas. It incorporates the cost of vehicle loan interest.
To use the Standard Mileage Method you need to keep a detailed mileage log. Using a reliable mileage tracker app like Falcon Expenses is a great way to do this.
At the end of the year, you multiply the total number of miles you drove for business by the Standard Mileage Rate to determine your total car tax deduction. Then, you enter this amount on your Schedule C that you attach to your tax return. Small business owners with an LLC that financed their car through their business would write off their car loan interest deduction through their LLC tax return.
Who should use the Actual Expense Method?
For those that only use their car a little bit for work, they will likely get a larger tax deduction using the Actual Expense Method. This would include freelancers and small business owners that work from a home office or a regular office a lot. For example, this might include lawyers and graphic designers.
Who should use the Standard Mileage Method?
The Standard Mileage Rate is the best method for writing off car expenses, which includes a built-in car loan interest amount if you do a lot of driving for work.
This would typically include independent contractors and freelancers such as delivery drivers and realtors / real estate agents. For freelancers working from home, this would not be the most ideal car loan tax deduction.
While freelancers and self-employed can’t write off their car loan payments, they can write off part, and in some cases all of their car loan interest. Further, there are a few caveats, as we have shown in this article, to writing off car loan interest. So make sure to review this article in detail so that you don’t skip over any important details.
In addition, whether you choose to use the Actual Expense Method or the Standard Mileage Method, Falcon Expenses is a great app to automatically log mileage or to track itemized vehicle and car expenses. In the end, Falcon Expenses will help to save you a lot of time, and hassle, ensuring that your car expense deductions are accurate and at their maximum so that you take home as much after-tax income as possible. With that said, don’t hesitate to download Falcon Expenses mileage tracker app, today.
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