business vehicle
September 16, 2024

Can an llc write off a car purchase?

Small Business Tax Deductions

Can You Write Off a Car for Your LLC?

If you're using your vehicle exclusively for business (no personal trips, no detours), then yes, you can write off the full cost of that car on your LLC books. Easy, right? But what if you also drive it for personal reasons sometimes? Does that mean you're out of luck? Not exactly. It’s a little more complicated, but we will guide you through it.

Here's the Deal with Miles đźš—

In our tax practice, we see a lot of business owners who mistakenly put all their vehicle expenses on their LLC books—thinking they can write off everything. But here’s the catch: You can only write off the portion that’s used for business. That means the personal use portion of your car expenses doesn’t count. So, how do you figure out how much of the car’s use is business-related?

The IRS has a simple solution: track your miles. Yes, it’s not the most glamorous part of running a business, but it’s necessary!

By keeping track of how many miles you drive for business vs. personal reasons, you can determine how much of your car expenses are deductible.

How to Track Your Miles đź“Š

Now, tracking miles doesn’t have to be a nightmare. Here are some ways our clients keep it simple:

  • Paper or Excel: Old-school but effective!
  • Apps like MileIQ: These apps automatically track your miles for you (goodbye, scribbled notes!).
  • Google Maps History: If you’re using Google Maps, you can pull up your driving history for a quick look at your business miles.

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. Here is a short summary:

Actual Method: Big Cars = Big Deductions 🏎️💸

  • Depreciation: You can’t write off car loan payments, but you can depreciate the car’s value each year, which gives you a big deduction.
  • Other Expenses: You can also write off fuel, insurance, repairs, and more—just keep track of the business use of your car. For example, if you drive 100 miles and 50 are for business, you can write off 50% of your car expenses.
  • Limits: Be aware that luxury cars have a deduction cap, and once you start depreciating, you can’t switch to the standard mileage method later.

Standard Mileage Method: Simple & Easy 🚙💨

  • This method is much simpler! The IRS gives you a standard rate (like 65.5 cents per mile in 2023) that includes everything—depreciation, fuel, repairs, etc.
  • Just track your business miles, multiply by the IRS rate, and boom—you get your deduction!

Once you understand this logic, you’ll see why putting 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 answer the big question: Can an LLC write off a car purchase?

First, let’s quickly understand what an LLC is. For more details, check out our blog on LLCs. In short, an LLC is a legal structure that provides liability protection and keeps your personal and business assets separate. Think of it as a legal "wrapper" for your business.

To figure out how to write off vehicle expenses, you need to know how your LLC is taxed at the federal level. Your LLC status itself doesn’t affect this.

By the way, there’s also a legal side to consider when writing off a car. If the vehicle is truly a business asset, it should be in the LLC’s name. Which means, your vehicle insurance costs will most likely go up.

Now, let’s focus on taxes. Once we know how your LLC is taxed at the federal level, we can determine the right way to record the business portion of the car expense and keep the IRS happy.

Sole Proprietors with LLCs (SMLLCs):

If you’re a single-owner LLC (SMLLC), you file a federal Schedule C along with your personal tax return. 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.

Now, if you use your personal vehicle for business, you can deduct the business portion of the car expenses. But here’s the catch: you can’t just slap those vehicle expenses on the LLC credit card unless the car is only for business use. Commingling personal and business expenses can jeopardize your LLC’s liability protection. And, let’s be real — what's the point of paying LLC fees if you’re not using it the right way?

So, how do you write off your car if you use it for both business and personal reasons? You can’t put the vehicle expenses through the LLC’s business credit card — that’ll mess with your financials and risk your LLC protection. Instead, you will need to calculate the business portion of your vehicle expenses separately and then enter this deduction on both your business records and your Schedule C (on your personal tax return). This way, you follow the rules, get your deduction, and don’t mix up personal and business expenses.

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):

For multi-member LLCs (MMLLCs), the LLC files a partnership tax return (Form 1065). Just like with sole proprietors, the LLC’s status at the state level doesn’t affect federal taxes. If you're using your personal vehicle for business, the same rule applies: you can't put your vehicle expenses on the LLC credit card unless the vehicle is 100% used by the LLC.

But how can you write off the business use of your vehicle in a partnership LLC? Here are your options:

  1. Reimbursement: You can have an agreement with your partners to reimburse you for the vehicle expenses.
  2. Unreimbursed Partnership Expenses (UPE): If no reimbursement agreement exists, you can still claim your car expenses on your personal tax return to offset business income. This deduction will show up on your Schedule E when you report your K-1 income from the LLC.

The key takeaway: even with an MMLLC, you must still calculate and separate the business portion of the vehicle expenses. And you must enter that portion in the tax software to avoid blending personal and business expenses.

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.

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.

The Takeaway:

  • If the car is 100% business use, you can put all expenses on the business credit card and deduct them.
  • If there’s personal use, it’s better to put expenses on your personal credit card and calculate what portion is for business use.
  • Your tax deductions depend on how the LLC is taxed at the federal level, but remember: keep personal and business expenses separate to stay legally safe!

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 business owners save on tax. You are welcome to check out our services here.