If you’re considering writing off your car on your LLC books but are unsure if this is possible or how to proceed, read on.
If your vehicle is fully used by your business with zero personal use, then yes, go ahead and write off the whole thing on your LLC books.
But what if you use the vehicle for personal purposes from time to time? Can you still write off your vehicle? And if yes, then how? The answer is complicated. But we can get through it.
Let’s start with miles.
We see this a lot in our accounting practice: a business owner puts all possible vehicle expenses on their business cards. If the vehicle is used for both personal and business purposes, this accounting practice is wrong, whether you vehicle is in LLC or not. You are allowed to deduct only the business portion of your vehicle expenses.
The personal portion of your vehicle expenses should not be deducted. So, how do you figure out the business portion of the vehicle that is used both for business and personal purposes? The IRS says: count your miles. In order to claim the vehicle’s business portion on your tax return, you first need to figure out your business miles and personal miles. Yes, mileage tracking is a pain, but it is necessary. Our clients usually track their mileage either on paper or Excel, or with apps like Mile IQ or by tracking their Google driving history.
Once you know your exact business miles, you can start on the second part of your vehicle deduction journey: trying to figure out what exactly you can deduct.
There is a lot written on this topic. In short, you can either pick the actual method or the standard mileage method.
The actual method is beneficial with new and expensive cars. Please note: the car loan payments themselves are not deductible; instead, you are given a depreciation expense, which is a non-cash expense that allows you to write off a chunk of the cost of your car and get a big deduction in the same year. Fuel and oil, repairs and maintenance, insurance, tires, registration fees, interest on the vehicle loan, and lease payments are other possible deductions for the actual method.
And again, the business deductible expenses should be calculated based on the percentage of business miles to all miles driven. For example, if you drove 100 miles total and out of these 100 miles, 50 were business miles, your business percentage is only 50%. In simple terms, if actual expenses of your vehicle were $10,000, you get to deduct only $5,000.
And of course, there is more to the actual method of vehicle deduction. There are limitations on expensive vehicles under 280F (read: you can’t fully write off an expensive car since the IRS put a cap on what you can actually deduct).
There is also a rule that states that if you choose to depreciate your car in the first year, you cannot switch to the standard mileage deduction in later years. This means you’ll be limited to deducting smaller expenses, such as fuel, insurance, and repairs, prorated between business and personal miles, until you dispose of the car.
And of course, there is a depreciation recapture issue: If you depreciate your car and get a tax benefit, in the future, you will need to pay that tax benefit back. But who knows what will happen in the future? That’s why we, tax accountants, love to gamble and write off things in the same year with such tax tricks as bonus depreciation and 179 expenses.
Now, there is a much easier second option: Standard mileage, which works great for vehicles with high mileage. Every year, the IRS calculates a new mileage rate, which includes the same types of expenses that are allowed under the actual method. The standard mileage rate already includes depreciation, fuel, insurance, repairs, and so on. The IRS ballparks the data and summarizes all expenses in one rate. For example, in 2023, the IRS rate was 65.5 cents per mile. With the standard mileage deduction, you do not need to worry about keeping track of actual expenses; it is all calculated for you. To take the deduction, you only need to multiply your business miles by the IRS rate for that year. So, if you drove 10,000 business miles and the IRS rate is 65.5 cents, you will get to deduct $6,550 of mileage expense on your tax return.
Once you understand this logic, you’ll see why deducting full vehicle expenses on your corporate books can be incorrect. It’s inaccurate because you’re claiming personal expenses that don’t belong to the business. Personal expenses should never be deducted on business books, regardless of whether your business entity is an LLC or not.
To read more about tracking miles and other mileage technicalities, you can read my other blog, in which I outlined step-by-step deductions on calculating your mileage.
Now, let’s get to the most important question: Can an LLC write off a car purchase?
To answer this question, we first need to understand what an LLC is. For more details, see our blog on LLCs. But in short, an LLC is a state-recognized legal entity that provides liability protection and separates personal and business assets. Think of it as a shiny legal “wrapper” for your business. To determine how to deduct vehicle expenses for business use, you need to know how your company is taxed at the federal level—your LLC status alone doesn’t affect this.
Yet, there is indeed a legal aspect to consider (not a tax issue—the IRS doesn’t concern itself with this) when writing off a car on an LLC’s books. If the vehicle is truly a business asset, it should be titled in the LLC’s name. Which means, your vehicle insurance costs will most likely go up.
But let's go back to the entity taxation rules. Once we determine how your LLC is taxed at the federal level, we can then figure out the proper way to record the business portion of the vehicle expense that would make the IRS happy.
Sole Proprietors with LLCs (SMLLCs): Single-owner LLCs file a federal Schedule C, which is attached to the owner’s personal tax return. As I mentioned earlier, LLC status has very little impact on the business owner's federal taxes. Think of an LLC as a legal add-on, while the main tax activity takes place on Schedule C. A sole proprietor may choose to form an LLC or not, depending on their preferences and state requirements.
A business owner who uses their personal vehicle for an LLC has the right to deduct the business portion of the vehicle expenses. The main question is: how? As I explained earlier, unless the vehicle is used exclusively by the LLC, vehicle expenses should not be charged to LLC credit cards. Additionally, business law states that commingling business and personal expenses can compromise your LLC’s liability protection. So, what’s the point of setting up and paying LLC fees if the LLC isn’t functioning as intended?
But how do you write off the vehicle that you also use in personal life on your LLC books? You can’t put the vehicle expenses through the business credit card since it gives a wrong idea of your profitability on your financials and also makes you lose your LLC protection. Well, you still get to deduct it on the federal Schedule C of your personal 1040 tax return, but you make sure that none of the actual vehicle expenses run through your LLC business cards. To do so, you need to calculate your business vehicle deduction separately and then enter this deduction on your business financials and on the Schedule C of your personal tax return. This way, the LLC legal rules are not broken, and you get the tax deduction that offsets your taxable income and you don't claim personal expenses of the vehicle.
How do you calculate the business portion of your personal vehicle? You need to go back to the rule about business and personal miles. But most DIY tax software will prompt you for that calculation and ask all the necessary questions.
Partnerships with LLCs (MMLLCs): Now let’s discuss the deduction of vehicle expenses on a multiple-member LLC, which files a partnership tax return (Form 1065). Again, just like with sole proprietors, an LLC is just a state legal entity that does not affect the way your business is taxed on the federal level. And it goes without saying that the owner’s personal vehicle expenses should not be put on business credit cards unless this vehicle is fully owned and operated by that LLC. How do you write off a business use of your vehicle for the partnership MMLLC? One option is to have an agreement with the rest of the partners that allows you reimbursement for your vehicle expenses. If such an agreement does not exist, you can manually enter your car business expenses on your personal tax return, and these expenses will offset your business income that came from the partnership's K-1. This deduction is called UPE or unreimbursed partnership expenses. Each tax software may have different access to this line on your individual tax return, and we won’t cover tax software here. But we will give you a link to a video that will help you understand how this principle works and where exactly to look for those lines on your personal return. You would need to calculate business vehicle expenses yourself using the same logic I outlined at the beginning of my blog. You would also need to decide between the standard and actual methods before entering these expenses in the tax software.
And just to reiterate our answer: yes, you can still write off a business portion of your personal vehicle in your LLC, but you can’t charge all of your vehicle expenses on LLC credit cards unless the vehicle is used by the business 100 percent. You must calculate and enter the business portion of the vehicle expense separately in the tax software.
As we mentioned earlier, an LLC is a legal entity that operates at the state level. An LLC can be taxed as a sole proprietor, a partnership, or even as an S Corporation at the federal level. When we talk about writing off your vehicle, we are discussing taxation issues on the federal level, not LLC legal rules. The LLC legal rules have another agenda: you can't commingle business and personal assets if you want to maintain your LLC protection.
We’ve covered the first two scenarios when an LLC is taxed as a sole proprietor and a partnership. Now, let’s explore how you can write off the business use of your car for an LLC taxed as an S Corp.
S Corps: On the state level, S Corps can exist as LLCs or Corporations and we wrote about it in detail here. In simple terms, these entities ask the IRS for S-Corporation status, and if the S Corp status is granted, the entities start filing S Corp returns (Forms 1120 S). S Corps have different rules when it comes to vehicle business expenses, but one common rule still exists: you should avoid putting all your vehicle expenses on business credit cards if the same vehicle was also used for personal purposes.
Now about differences: when the car is owned in the corporation’s name, it is not allowed to deduct mileage, only the actual expenses incurred for its use in business. This means that once the car is fully depreciated, the owner will be stuck only with minor expenses, such as gas, maintenance, insurance, repairs, and so on. The owner won't be able to deduct standard miles if the vehicle is listed on the corporate books.
But what if the vehicle listed on corporate books, which is supposed to be fully used for business purposes, is still used personally by the S-Corp owner? Well, the LLC rules regarding commingling are probably broken. But the IRS does not care about legal rules. The IRS only cares about taxes they can collect from the taxpayers. The IRS says that when a vehicle is used personally, the owner must calculate the personal use amount of the vehicle expense and add it back as wages to their own salary. As we remember, shareholders pay self-employment taxes on their W-2. This means they consequently pay self-employment taxes on the personal use of the business vehicle that was put on S-Corp books. Going through all these calculations seems like a lot of work for very little tax benefit. And that's why in our practice we use a different option. The IRS allows accountable plans for personal vehicles used in S Corps. We described this process in detail here. But in simple terms, the business owner needs to reimburse themselves for the business vehicle expenses, either based on standard miles or actual miles as we described at the beginning of this article. Accountable plans are much easier to implement since the payroll forms are not involved.
For single-owner S Corps, CPAs sometimes use a backdoor journal entry: they calculate all vehicle business expenses and then enter them on the tax return books as a shareholder contribution. This approach allows the S-Corp to deduct the expenses and increases the shareholder's paid-in capital (which is generally good), but the cash itself doesn’t change hands, meaning you won’t get non-taxable cash.
So, to answer the question of whether the LLC can write off the car, we first need to understand how vehicle expenses are calculated. If the vehicle is used 100 percent for business, there is no problem putting all vehicle expenses on business credit cards and deducting them on the business financials (though not all depreciation may be allowed under 280F, all other expenses should be allowed). To be legally safe, you may want to consider transferring the title of the car to the LLC. However, if there is any personal use involved, you are better off putting all expenses on personal credit cards and then doing some accounting calculations to separate personal and business usage of your vehicle. After determining the amount of the business expense, you need to consider how the LLC is taxed at the federal level. Depending on the federal tax classification of the LLC, you will then determine the process for taking this business deduction. The deduction is taken on the tax return, but the actual vehicle expenses themselves do not show up on business credit cards and do not pierce the LLC's corporate veil.
And now a shameless plug: if you need assistance with your S Corp tax planning, accounting, or have any "how-to" questions, please keep us in mind. We operate virtually and have helped hundreds of California business owners save on tax. You are welcome to check out our services here.