If you are a self-employed business owner and you finance or buy a car, can you write off car payments from your taxes?
Car loan payments and lease payments are not fully tax-deductible.
The general rule of thumb for deducting vehicle expenses is, you can write off the portion of your expenses used for business. So "no" you cannot deduct the entire monthly car payment from your taxes as a business expense.
However, the good news is you will still be able to write off a percentage of your car and truck expenses to lower your taxable income. As long as they are for business use, you'll be able to claim tax deductions on the expenses you incur for using your vehicle.
In this article, we'll review the three most common scenarios for deducting car payments from your taxes as well as give a short overview of the IRS-approved methods for writing off car expenses.
Note: If you want to claim all of your actual vehicle expenses from your taxes without the headaches of manually sorting through your receipts, try Bonsai Tax. Our software will scan your bank/credit card statements to discover all of your vehicle expenses as well as all the other deductions you qualify for. In fact, users typically save $5,600 with our app. Try a 14-day free trial today.
The majority of independent contractors and small business owners fall into this category.
If you use a personal car for business purposes, you will NOT be able to deduct your car payment if you bought this vehicle using a loan. If you use the same car for both personal use and business reasons, you can deduct a portion of your loan interest, however.
There are two IRS-approved methods for deducting vehicle expenses: the actual expense method and the standard mileage rate.
Only one of the two methods can be claimed in a tax year. After the first year, you'll be able to alternate between the two methods. However, with both methods, you'll report your total vehicle deduction on Schedule C of your tax return, which includes your car loan interest.
Since only one method can be claimed, you'll need to carefully calculate which one will lead to a greater tax deduction.
The actual expenses method requires you to track and add up all the money spent on the business use of your vehicle. Although it may seem like a lot of extra work, apps like Bonsai Tax can make tracking receipts a breeze. The software can scan your bank/credit card receipts to discover potential business expenses to deduct from your taxes.
The actual expenses method generally saves business owners and independent contractors more money at the end of the tax year. Gig app workers like Grubhub contractors, Lyft or Uber rideshare drivers, and Instacart drivers may be an exception to this. Their business mileage may lead to a greater deduction than claiming the actual expense method.
A lease payment counts as an actual expense if you claim this method. This method does not include monthly payments or down payments for a car loan but you can deduct the business use of your vehicle’s expenses listed below.
Here is a list of business-related vehicle expenses you can deduct from your taxes when you use the actual method.
One of the big attractions for companies purchasing their vehicles lies in the depreciation write-offs. Since 2019, a 100% car price deduction is in the cards for numerous vehicles. However, if you lease your cars and opt to deduct actual vehicle expenses (i.e., not an owner), you can’t jump in on that. Instead, the lease’s business portion (which may or may not be 100%) is deductible, bringing us to the subject of income inclusion.
You derive the business portion only after deducting the income inclusion from the lease installments. Here's how it works:
The IRS changes the value every year (with an increase) applicable to the next five years.
The standard mileage rate method was introduced by the IRS to make it easier to write off vehicle expenses. Instead of tracking and recording all the business portion for your car expenses, you would simply track how many miles you drive for business. Remember, you cannot deduct actual car expenses separately.
You can use a mileage log to track of your business miles.
For example, let's say you drove 65,000 miles in a year for both personal and business use. If you drove 6,000 miles for business purposes, then you would simply multiply 6,000 by the year's standard mileage rate. In 2021, the standard mileage rate was 56 cents. So, your total tax-deductible expense would be $3,360.
It is also possible to claim the business miles for a leased vehicle.
If you use the standard mileage rate, you are still allowed to deduct some actual expenses. These 3 expenses are still deductible.
Use the Standard mileage deduction method for a simple way to calculate the business use of your vehicle expenses. Remember, you cannot use the lease payment as a deduction if you claim the standard mileage method. Try Bonsai's mileage tracker template to keep records for this deduction.
If you're an auto lessee opting for a standard mileage rate in the first year, the IRS requires you to stay with it throughout the lease period.
If "self-employed" for tax purposes, the IRS advises you to elect the standard mileage rate option in Year-1 because it:
With all that said, let's get to the unique characteristics of each method.
This is the one exception to deducting car payments--if a car is used one hundred percent of the time for business.
Keep in mind, this policy regarding car tax deduction is more in the line of a company car, not the use of personal vehicles for business purposes.
If you purchase a car strictly for only business use, you can deduct the cost entire cost of business-owned vehicles and their operation. Be warned, the IRS is often suspicious of folks who claim they purchased and used a car for "only business". Chances are slim that a self-employed business owner would use a vehicle 100 percent for business use so trying to deduct the entire cost of your company car looks fishy.
We always recommend you work with a certified public accountant if you have any questions in regards to writing off your vehicle for business use.
A verbal contract (formally called an oral contract) refers to an agreement between two parties that's made —you guessed it— verbally.
Formal contracts, like those between an employee and an employer, are typically written down. However, some professional transactions take place based on verbally agreed terms.
Freelancers are a good example of this. Often, freelancers will take on projects having agreed on the terms and payment via the phone, or an email. Unfortunately, sometimes clients don't pull through on their agreements, and hardworking freelancers can find themselves out of pocket and wondering whether a legal battle is worth all the hassle.
The main differences between written and oral contracts are that the former is signed and documented, whereas the latter is solely attributed to verbal communication.
Verbal contracts are a bit of a gray area for most people unfamiliar with contract law —which is most of us, right?— due to the fact that there's no physical evidence to support the claims made by the implemented parties.
For any contract (written or verbal) to be binding, there are four major elements which need to be in place. The crucial elements of a contract are as follows:
Therefore, an oral agreement has legal validity if all of these elements are present. However, verbal contracts can be difficult to enforce in a court of law. In the next section, we take a look at how oral agreements hold up in court.
Most business professionals are wary of entering into contracts orally because they can difficult to enforce in the face of the law.
If an oral contract is brought in front of a court of law, there is increased risk of one party (or both!) lying about the initial terms of the agreement. This is problematic for the court, as there's no unbiased way to conclude the case; often, this will result in the case being disregarded. Moreover, it can be difficult to outline contract defects if it's not in writing.
That being said, there are plenty of situations where enforceable contracts do not need to be written or spoken, they're simply implied. For instance, when you buy milk from a store, you give something in exchange for something else and enter into an implied contract, in this case - money is exchanged for goods.
There are some types of contracts which must be in writing.
The Statute of Frauds is a legal statute which states that certain kinds of contracts must be executed in writing and signed by the parties involved. The Statute of Frauds has been adopted in almost all U.S states, and requires a written contract for the following purposes:
Typically, a court of law won't enforce an oral agreement in any of these circumstances under the statute. Instead, a written document is required to make the contract enforceable.
Contract law is generally doesn't favor contracts agreed upon verbally. A verbal agreement is difficult to prove, and can be used by those intent on committing fraud. For that reason, it's always best to put any agreements in writing and ensure all parties have fully understood and consented to signing.
Verbal agreements can be proven with actions in the absence of physical documentation. Any oral promise to provide the sale of goods or perform a service that you agreed to counts as a valid contract. So, when facing a court of law, what evidence can you provide to enforce a verbal agreement?
Unfortunately, without solid proof, it may be difficult to convince a court of the legality of an oral contract. Without witnesses to testify to the oral agreement taking place or other forms of evidence, oral contracts won't stand up in court. Instead, it becomes a matter of "he-said-she-said" - which legal professionals definitely don't have time for!
If you were to enter into a verbal contract, it's recommended to follow up with an email or a letter confirming the offer, the terms of the agreement , and payment conditions. The more you can document the elements of a contract, the better your chances of legally enforcing a oral contract.
Another option is to make a recording of the conversation where the agreement is verbalized. This can be used to support your claims in the absence of a written agreement. However, it's always best to gain the permission of the other involved parties before hitting record.
Fundamentally, most verbal agreements are legally valid as long as they meet all the requirements for a contract. However, if you were to go to court over one party not fulfilling the terms of the contract, proving that the interaction took place can be extremely taxing.
So, ultimately, the question is: written or verbal agreements?
Any good lawyer, contract law firm, or legal professional would advise you to make sure you formalize any professional agreement with a written agreement. Written contracts provide a secure testament to the conditions that were agreed and signed by the two parties involved. If it comes to it, a physical contract is much easier to eviden in legal circumstances.
Freelancers, in particular, should be aware of the extra security that digital contracts may provide. Many people choose to stick to executing contracts verbally because they're not sure how to write a contract, or they think writing out the contract terms is too complicated or requires expensive legal advice. However, this is no longer the case.
Today, we have a world of resources available at our fingertips. The internet is a treasure trove of invaluable information, platforms, and software that simplifies our lives. Creating, signing, and sending contracts has never been easier. What's more, you don't have to rely on a hiring a lawyer to explain all that legal jargon anymore.
There are plenty of tools available online for freelancers to use for guidance when drafting digital contracts. Tools like Bonsai provide a range of customizable, vetted contract templates for all kinds of freelance professionals. No matter what industry you're operating in, Bonsai has a professional template to offer.
A written contract makes the agreement much easier to prove the terms of the agreement in case something were to go awry. The two parties involved can rest assured that they're legal rights are protected, and the terms of the contract are sufficiently documented. Plus, it provides both parties with peace of mind to focus on the tasks at hand.
Bonsai's product suite for freelancers allows users to make contracts from scratch, or using professional templates, and sign them using an online signature maker.
With Bonsai, you can streamline and automate all of the boring back-office tasks that come with being a freelancer. From creating proposals that clients can't say no to, to sealing the deal with a professional contract - Bonsai will revolutionize the way you do business as a freelancer.
Why not secure your business today and sign up for a free trial?