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Accounting and Tax Tips Blog

Turo and other carsharing apps changed the game for vehicle owners. These apps allow drivers to get better returns on the money they invested in their vehicles. It’s a  great opportunity for people with cars they barely use. Some entrepreneurs even use these apps as an alternative to a traditional car-rental business. Sometimes, carsharing can even provide extra tax benefits. If you earned money on Relay Rides, Turo, or Maven, you can claim car depreciation deductions on your taxes.

However, car depreciation isn’t just for people who rent their vehicles. Most 1099 contractors who use their vehicles for business purposes can take advantage of these write-offs. If you’re a 1099 contractor and you have a car, you can probably deduct a portion of your vehicle expenses at tax time. 

Car Depreciation

There several types of car depreciation available to car-sharers and contractors. Many independent contractors choose the standard mileage deduction for vehicle depreciation. It’s the easiest way to calculate depreciation, but some drivers could save more with cost-basis depreciation.  Click here to see our complete guide to the standard mileage deduction. Here, we’ll take a closer look at the other major options: Actual Expense Depreciation and Section 179 Depreciation.

Standard Mileage Deduction

If you use your personal car for business, you can write off the cost of business use with the standard mileage deduction. For 2019, the standard mileage rate for cars, vans, pickups, and panel trucks is 58 cents for every business mile. However, you can only claim the standard mileage rate if you’re calculating depreciation with the straight-line method.

Actual Expense Depreciation

This method of depreciation allows you to deduct the actual cost of your business-related vehicle expenses. It includes things like gas, maintenance, and other direct costs. If you plan on utilizing this method, you should keep close track of these types of expenses. You should save your receipts or catalog them digitally with expense-tracking software. You should hold onto these records for at least three years because that’s how long the IRS has to open an audit. As usual, stick to the facts and don’t exaggerate your vehicle costs. Otherwise, you could find yourself on the wrong end of an IRS audit.

What Is Section 179?

This type of vehicle depreciation uses Section 179 to calculate deductions. It could save you a lot of money on your taxes. Here is what it is and how to claim it on your 2019 taxes.

A Section 179 deduction allows you to fully deduct the cost of a newly-purchased business asset. For carsharing users, this means that you can use Section 179 to deduct the cost of purchasing or leasing a new or used vehicle for your carsharing business. This reduces your taxable income and your tax bill.

​However, your Section 179 deduction must not exceed your carsharing business’s net income for the year. If it does, you can carry over the deduction to a future tax year.

Section 179 Business Use Rules

In order to qualify for the Section 179 vehicle deduction, you must put the vehicle in service (for business use) within the same year that you plan to claim the deduction. That means that if you plan to claim a Section 179 deduction in 2020, you must put the vehicle into service between January 1st and December 31st of this year. You must also use the vehicle for business at least 50% of the time you drive it.

If you don’t use the vehicle for business at least half of the time at any point during the 5-year period, you will be required to repay your Section 179 deductions and your bonus depreciation. You should keep track of your business mileage at all times to avoid running into problems.

Using Section 179 for Car Depreciation

​Both new and used vehicles qualify for Section 179 deduction. What matters most is the weight and type of vehicle because the limits on Section 179 are lower for passenger vehicles that have a gross vehicle weight rating (GVWR) of 6,000 lbs or less. Most passenger cars, including mid-size and compact cars, weigh less than 6,000 lbs, while almost all crossover vehicles, SUVs, trucks, and vans weigh more than 6,000 lbs.

However, the following vehicles are not subject to the passenger vehicle limit including:

  • An ambulance or hearse used specifically for business;
  • Taxis, transport vans, and other for-hire vehicles used to transport people or property.
  • Vehicles that have been specifically modified for business (for example, a van with the rear seating removed).

Annual Limits

For 2018, the maximum Section 179 deduction for a vehicle in excess of 6,000 lbs is $25,000 if the vehicle is placed into service before December 31st. Starting in 2018, a business owner may also purchase up to $2.5 million in Section 179 assets each year. This means that you can potentially purchase or lease an entire fleet of vehicles to use in your carsharing business and claim deductions for several of the vehicles if your net business income is high enough.

How to Claim Section 179 Deduction on Your Tax Return

​In order to correctly calculate your Section 179 deduction, you will need to accurately determine the GVWR of your vehicle. This information can be obtained by looking at the manufacturer’s plate or sticker found in the driver’s side doorjamb of your vehicle.

To claim a Section 179 on your tax return for the current year or a carryover deduction for the prior year, you must complete and attach Form 4562, Depreciation and Amortization to your tax return. Make sure to add lines 9 and 10 to enter the deduction amount on line 12.

Heavy Vehicle Depreciation Bonus

Section 179 allows business owners to claim bonus depreciation for heavy vehicles. If you recently purchased a heavy vehicle with a Gross Vehicle Weight Rating (GVWR) of 6,000 pounds or more, you can deduct 100% of its cost in one year. You must use the vehicle for business purposes 100% of the time to claim the full deduction. 

Cars don’t qualify for unlimited bonus depreciation, so only heavy vehicles can utilize this special deduction. For tax-year 2019, the government increased the deduction limit to $1 million.

Example

 To help you better understand how to claim a Section 179 vehicle deduction, we’ve provided the following example for a heavy vehicle with a GVWR of over 6,000 lbs:

You purchase an SUV for $50,000 and start using it on January 1, 2019. You earn $10,000 from carsharing during the year and use the vehicle for business 60% of the time. Since you engaged in an income-producing business, you can claim business-related expenses, including depreciation. Under the bonus depreciation rules, you can deduct 100% of your business vehicle’s cost, adjusted for the business-use rate. Therefore, you can deduct 60% of the vehicle’s cost, $30,000, from your taxable business income this year. That leaves you a net loss of $20,000. You can use this loss to offset income elsewhere, so it can be a useful writeoff for carsharing.

Modified Accelerated Cost Recovery System (MACRS)

The Modified Accelerated Cost Recovery System (MACRS) is an IRS-accepted method for tax depreciation. The Modified Accelerated Cost Recovery System (MACRS) is applicable to vehicles placed in service after 1986. Under MACRS, cars are classified as 5-year property. This means that you can depreciate the cost of a car, truck, or van over 5 years and you can use one of the following methods to depreciate your car:

1. 200% Declining Balance Method (200% DB)

This method provides greater deductions during the early recovery years. When this method provides an equal or greater deduction, you must switch to the straight-line method.

2. 150% Declining Balance Method (150% DB).

This method provides greater deductions during the early recovery years. When this method provides an equal or greater deduction, you must switch to the straight-line method.

3. Straight Line.

This method provides equal yearly deductions throughout the 5-year recovery period. 

Special Depreciation Allowance

For vehicles placed in service in 2015, you can take an additional 50% special depreciation allowance. This is an additional deduction that you are allowed to take after any section 179 deduction and before you figure regular depreciation under MACRS. The special car depreciation allowance equals 50% of your total depreciation write-off.

Depreciation Limits

For applicable vehicles, the IRS caps depreciation deductions at $11,160 for cars and $11,560 for trucks and vans for 2019. In addition, you can find the depreciation limits for 2020 here.

Use Schedule C (Form 1040), Line 13, to report these deductions. You must also complete and attach Form 4562.

Final Tips

Most carsharing users buy or lease cars specifically for renting out on carsharing websites. In addition, car-sharing platforms often have restrictions on vehicle mileage and model year. Consider these factors when calculating vehicle depreciation.

Most business owners can net significant tax savings with car depreciation. However, make sure you are calculating your vehicle deductions properly or you could face IRS penalties.  If these depreciation guidelines sounds complicated, you should consider hiring a tax advisor. At Shared Economy Tax, we specialize in independent contractor taxes. We’ve been helping carshare owners maximize their depreciation write-offs for years, so we can help you identify the best depreciation method for your business. Get started today with a free one-on-one strategy session today, or use the form below to signup for our newsletter to get free tax tips in your inbox.