4 Basic Company Car Tax Limitations

January 27, 2012

If your business owns a company car, tax deductions are plentiful and should be used at every opportunity in order to save on income taxes. If you use a company car, taxable income can be reduced with a number of legal deductions for expenses associated with using a vehicle for business use.

Although there is no magic company car tax calculator that makes calculating these deductions straight forward and easy, knowing the limits on these types of deductions can help make claiming them on your tax return a little easier. So, here is a list of limitations for some of the most common business car tax deductions.

Depreciation Cost Limitations

While you can usually claim up to $250,000 in depreciation costs for general business property and equipment, the depreciation limit for vehicles is much lower. If your small business uses a passenger vehicle in the day-to-day operations of the business, then the maximal amount depreciation on your federal income tax return is $2960. If you use a pickup truck, then the limit is $3060. This is the limit for depreciation in the first year of service. However, from time to time Congress does authorize bonus depreciation amounts that can also be deducted.

Standard Mileage Rate or Actual Expense Method - But Not Both

When claiming expenses to be deducted for your business used vehicle, you can use one of two methods: the standard mileage rate method or the actual expense method. However, you may not use both of them.

If you use the standard mileage rate method, you will simply need to calculate the number of miles driven for business purposes and then multiply it by the IRS approved rate which varies from year to year. If you use the actual expense method, you are allowed to deduct all actual costs of operating the vehicle for business purposes. Regardless of the method you use, you must be able to prove the vehicle was used in the operation of the business.

Exceptions for Limits on Large Vehicles

While the depreciation limit for regular passenger vehicles and smaller pickup trucks is somewhat limited for small businesses, there are exceptions for large SUVs and large pickup trucks. If your business purchased a vehicle that weighs over 6000 pounds, you may be able to deduct the entire cost of the vehicle on your federal income tax return. Currently, the limit for deductions for these types of heavy vehicles as $250,000.

Limits on Sales Tax Deductions

If your small business wants to take advantage of the federal tax credit for sales tax paid to your state Department of Revenue for a new vehicle purchase, you should be aware that the maximum purchase amount for the vehicle is $49,500. This means you'll only be able to claim a credit for sales tax paid on  purchase price up to that amount. You will not be able to claim a sales tax credit for the portion of the sales price that exceeds $49,500.

You may also be able to take advantage of a sales tax credit on your federal income taxes if your small business paid more in sales taxes than it did in state income taxes during the current tax year. Generally speaking, the IRS allows you to choose between deducting the amount of state income tax your business pays and the amount of sales tax that is paid. If you choose to deduct state sales tax, you'll need to make sure that you have receipts and records for all the purchases you are claiming.


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