How to Buy an SUV With Help from Uncle Sam

Best tax saving tips for small businesses and sole proprietors

Q.   I am the sole shareholder and employee of a business and would like to know if I can buy a new car with corporate assets. A dealer says I can do this. Would this purchase be deductible as a legitimate business expense?

A.   Every once and awhile I write a column that irks certain groups of people who resist laying out the entire story, what I call the "real deal," to aspiring entrepreneurs and small business owners. With today's column, I get to win new friends among car dealers and at the same time irritate environmentalists who are concerned about global warming.

The good news is there are several ways for business owners to cut their taxes by deducting the costs of buying and operating a car that is used, at least in part, for business purposes. The key to maximizing these opportunities is documentation, says Sandy Botkin, former IRS attorney and author of "Lower Your Taxes – Big Time!"

So what's deductible? Like any other business asset, the IRS allows business owners to depreciate the purchase price of a vehicle over a period of time – which is usually six years. Of course, this sum is reduced to the percentage that the car is used for business purposes.

There are some limitations to depreciation deductions if you buy a standard passenger automobile. However, if you buy a truck, van or SUV that weighs more than 6,000 pounds (think Cadillac Escalade) then the annual limits on depreciation don't apply. Even better (or worse depending on your point of view), if you use this vehicle at least 50% for business you may be able to deduct up to a whopping $25,000 of the vehicle's cost in the first year and then depreciate the balance over the next 6 years.

The downside of buying a new car within a corporate entity is the business would be required to report the cost of the car's fair rental value for non-business related use. This annual cost can add up if the car is expensive and only marginally used for business purposes. Botkin says in this case, it's better to buy the car personally and then submit mileage expenses to the corporation.

Here are a few other nuggets from Botkin's book:

• Home-based business owners generate bona fide business miles from the moment they step into their car and drive to a business appointment; whereas business owners who work at a separate office can only deduct miles driven from the office to a business appointment.
• The IRS does not require business owners to write down every mile driven for business purposes. To reduce paperwork, owners can keep a detailed driving log for 3 months and then apply the percentage of business miles traveled to the entire calendar year's deduction calculation.
• Self-employed business owners, but not corporations, have the option of writing off their vehicle expenses through the IRS's standard mileage rate of 48.5 cents per mile or actual expenses.
• Business owners that use the actual expense method can deduct (up to the percentage of business use) interest, gas, washing, depreciation, insurance, repairs, tolls and taxes. Yes, interest too!
• There are several tax credits available to purchasers of hybrid and alternative fuel cars. Unfortunately, some credits expire after the first 60,000 cars are sold in the U.S. It's important that car buyers ask the dealer for documentation of model car sales before taking the tax credit.

I've seen entrepreneurs haggle with suppliers over pennies but completely ignore the opportunity to save big dollars through legal tax deductions. Botkin's book lays out how business owners can deduct vacations, home offices, entertainment and so much more is a reader friendly way.

Do you want to find reliable investors for your business? Write to Susan at susan@takecommand.org for great funding references and tips designed especially for startup entrepreneurs, sole proprietors and fast growth companies.

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