Vehicle Write-Offs for a Sole Proprietorship
A sole proprietor is a single owner of a business entity, and as such, is personally responsible for all of the tax liability of his company.
Vehicles can be leased or purchased through the sole proprietorship and the eligible expenses written off on tax returns.
Because a sole proprietor is personally tied to his business finances, care must be taken to document all eligible vehicle expenditures to realize the full tax savings.
When a sole proprietor takes tax write-offs for a vehicle used in legitimate business operations, he must differentiate between personal and business use of the vehicle in question.
For example, a sole proprietor might have a vehicle that is used for business 50 percent of the time and personal use 50 percent of the time. Only the expenses associated with the business usage are eligible for tax write-offs.
Lease payments and vehicle maintenance of a car leased through a sole proprietor are tax-deductible in the same manner if you opt to deduct the cost of actual operating expenses.
Eligible operating cost deductions include vehicle registration, insurance and licensing fees, gas, oil changes and other routine maintenance, as well as parking fees and costs associated with replacing windshield wipers, brakes, tires and other repairs.
A sole proprietor could alternatively opt to claim a tax write-off based on mileage rather than actual costs, using the Internal Revenue Service’s standard mileage deduction.
For the 2019 tax year, the deduction was 58 cents per mile. Fleets of more than five vehicles are not eligible for write-off, nor are traffic tickets or other motor vehicle violation fines.
The purchase of a vehicle by a sole proprietor for business purposes is considered a capital expenditure. In this instance, a sole proprietor can utilize an IRS Section 179 deduction that governs special depreciation allowances and deductions.
This approach allows the sole proprietor to deduct the business portion of eligible ownership and operating costs each year the vehicle is in use. If you sell or trade the vehicle, you might be responsible for paying capital gains tax or realizing a deductible loss.
To be eligible for a vehicle tax write-off, all expense receipts must be retained. Mileage logs and maintenance schedules are recommended for verification.
Again, only costs associated with business usage are tax-deductible.
So if you use your vehicle for business purposes 50 percent of the time, you can only deduct 50 percent of the cost of vehicle operating expenses.