If you operate one or more vehicles for work, you might be wondering what you can and can’t deduct when it comes to taxes, or what happens when your vehicle gets in an irreparable accident.
Is your vehicle eligible for any write-offs at all? When it comes to taxes, what counts as a personal expense, and what’s a business expense? Will you still be insured in case of a write-off?
Here are some of the answers you need!
What is a Write-Off?
In basic terms, a write-off happens when a vehicle has been damaged to the point where it would cost more to repair than the car is worth.
This not only applies to accidents but also to cars that degrade and wear down over time.
Most insurers will only pay up to the current blue book value of your car. To help organize this process, insurers have created several categories of write-offs.
Let’s take a look at them now:
- Category A write-offs are for when a car’s case is “terminal.” It’s damaged so far beyond repair that even the parts themselves have no significant value. This is what they mean by “totaled.”
- Category B write-offs are for when a car is still damaged beyond repair, but some of the parts can be salvaged or reused. This isn’t a much better situation than a Category A, but at least it’s not total.
- Category S (the ‘S’ stands for ‘structural’) means the car can be repaired and made road-worthy again, but only after being inspected by a mechanic and (probably) a lot of expensive repairs.
- Category N is when the structural frame of a vehicle is still intact after an accident, but there has been damage to important components like the brakes, steering system, or the engine. Cars often end up in this category when they’ve been in an accident and there’s not much serious exterior damage, but something vital has gone wrong inside.
Write-Offs and Insurance
So what does it mean when your car has been written off, but you still have auto insurance? Will your insurer replace your car with another exactly like it?
The unfortunate answer is, not likely. Most insurers will only pay for the current market value of the car, which means there will be a “gap” between the amount your insurance company will reimburse you and the cost of replacing the vehicle.
To help address this, some motorists get gap insurance, which will cover the amount not accounted for by the insurers.
Tax Deductions and Write-Offs
Now let’s talk a little about tax deductions when it comes to your business vehicle. There are three important types of deduction available:
The most important deduction to familiarize yourself with is the Section 179 deduction. This means you can claim a deduction on a business vehicle the same year it was put into service if the vehicle is used for business purposes more than 50% of the time.
If you buy the car for personal use and later put it into business service, you aren’t eligible to receive the deduction — also, commuting doesn’t count as business use under general circumstances.
There are also specific rules for SUVs and other types of vehicles, so it pays to learn whether a vehicle would be fully eligible before you purchase it for business use.
To use a standard mileage deduction, you multiply how many business miles you drove by the standard mileage rate (currently 58.5 cents per mile).
As stated above, commuting miles (miles driven from work to home and back again) do not count toward this total.
Obviously, to be eligible for this deduction, you must keep detailed records in order to support the deduction claim.
Using the mileage deduction precludes deducting other vehicle-related costs, which are confined to the actual expense deduction (see below).
Actual Expense Deductions
If you take the option of the actual expense deduction, this also requires keeping careful track of business-related expenses.
If you use your car for personal use as well as business use, this means you can only deduct the expenses incurred while using the vehicle for business.
The expenses you can deduct, according to the IRS, include:
- Garage rent
- Lease payments
- Parking fees
- Registration fees
As said above, keeping careful records is very important in case you should get audited. This means tracking things like receipts and invoices, as well as keeping a mileage and/or fuel log.
If you qualify for more than one of the deductions listed above, you may want to run some numbers yourself or talk to a tax preparer to see which method will save you the most money in the long run.