Can an LLC Write Off a Car Purchase?

Whether you drive a van to your catering jobs or a truck to construction sites, owning and maintaining a vehicle will be a considerable expense.

No wonder that most business owners in your position wonder if they should form an LLC with doola to 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 must take 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 personal and business purposes, the expenses must be split.

In that case, the allowed deduction is based on business mileage. No deduction can be claimed for 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 is essential for the company’s operations.

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.

Remember that your LLC can’t write off these expenses if you use five or more cars. The IRS considers them a fleet and doesn’t provide a tax benefit beyond that.

Employees who are not business owners can’t also claim write-offs for business vehicles.

Not everyone can afford to have separate business and personal vehicles, particularly small business owners.

There will be times when they use their vehicles 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 commuting from home to your workplace doesn’t qualify as business mileage.

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

As a business owner, you can justify the business use of your vehicle in several ways. This will require you to be particularly diligent with your record-keeping. 

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.

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, tyre 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. Under this section, the LLC can write off the entire purchase price of the car.

It allows for an immediate expense deduction that business owners can use to purchase depreciable equipment.

There aren’t many limitations on which cars can be written off under this section.

Any four-wheeled vehicle 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 several factors must be considered.

To be eligible for the Section 179 deduction, the car must be used more than 50% of the time for business purposes.

However, the cost of the car is typically subject to depreciation rules, and the IRS only allows a portion of the cost 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 bonus depreciation can also be claimed for a total deduction of $20,200 in 2023.

The tax deduction limit for heavy vehicles with a gross vehicle weight rating of 6,000 pounds and not exceeding 14,000 pounds 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 used for business purposes 100% of the time.

If the car is used 50% for business and has 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 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 its use and maintenance.

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 it deducts. The best way to do that is to keep detailed records of all relevant spending.

Keep all the invoices, receipts, mileage logs, and 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

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

Get started with doola’s business formation services, which can help you through every step, from incorporating your LLC to managing tax compliance.

Reach out today and learn more about how we can help make this process easy for you.

FAQs