The Short Answer

Yes, you can see reduction in the amount you owe the government on annual taxes if you purchase a new car. However, there are considerations. Multiple means of deduction exist, some cancel each other out. In this writing we'll briefly cover a few different methods that you may find you qualify for.

  • Interest Deductions For Financing
  • Sales Tax Where States Collect Income Tax
  • Actual Expenses And The Average Mileage Rate

Interest Deductions For Financing

If you're financing a vehicle, you have the option of deducting interest from federal taxes. Interest accrues over time, and if you've got something like a $500 payment on a $30k vehicle, it's going to take a little while to pay that off.

You're looking at a minimum of five years even if you don't have any interest. You can expect interest to be 5.76% for car loans on average in America. So over sixty months, assuming you had no downpayment (which isn't likely, but just to make things easier), you'd be looking at about $35k when the dust settled. Now that's over sixty months, but it's about $1k a year you can deduct from your taxes, on average.

Sales Tax Where States Collect Income Tax

If your state collects income tax, even if you're buying a used vehicle, you have the option of deducting that. It may not be worth it to pursue this deduction. You'll have to itemize all deductions, including that of sales tax. This has to be itemized on a Form 1040, look under Schedule A. Without itemization, sales tax deduction isn't allowed. But there is a better way to reduce annual costs based on vehicular usage.

Actual Expenses And The Average Mileage Rate

A new car depreciates the moment you buy it, and this is deductible. If you've got lease payments, they can be deducted. Gas is deductible, oil is deductible, tires are deductible, as are varying repairs, tune-ups, insurance, and registration fees. You'll have all of these every year with a new or used vehicle, and you can deduct on either. But there's also something called the "standard mileage rate" that you can use to essentially estimate deduction costs.

When you're running a vehicle for business use, how you use that vehicle represents a deductible quantity. To make this work, you'll have to claim mileage deduction within the first year your business begins. If you're leasing a vehicle, standard mileage rate deduction has to be used throughout the period in which that vehicle is leased.

The rate, as of 2019, is 58 cents a mile. Now people average 15k miles a year in America. If you drive a lot, this is your best bet. You can deduct $8,700 for 15,000 miles. However, this does have to be deducted in connection with your business. Talk to your CPA to be sure you properly qualify to avoid finding unnecessary trouble.

A New Car For Less

Between insurance, state income tax, actual expense deduction, and mileage, you can reduce what you're on the hook for by a substantial margin. But you want to be careful to do the booking right, and not "double dip". You can only claim such deductions if you meet the right requirements. You can't go with itemization and mileage. So weigh the two and see which is going to be better for you, and be sure to figure this out quick after starting a business. That said, you can reduce your financial burden for a new vehicle through careful tax preparation.

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