Car Depreciation for Taxes: 1099 Contractors & Car Sharers

Car-sharing apps have revolutionized the way vehicle owners make use of their cars. These platforms offer a fantastic opportunity for car owners to maximize the value of their investments. It’s especially beneficial for those who have cars sitting idle most of the time. In fact, some entrepreneurs have even turned to these apps as an alternative to traditional car rental businesses. And here’s the bonus – car sharing can come with additional tax benefits. If you’ve earned income from services like Relay Rides, Turo, or Maven, you may be eligible to claim tax deductions for car depreciation.

But the good news doesn’t stop there. Car depreciation write-offs aren’t exclusive to those renting their vehicles. Many independent contractors, operating under a 1099, who use their cars for business purposes can also take advantage of these tax deductions. If you’re a 1099 contractor with a vehicle, you likely can deduct a portion of your vehicle-related expenses come tax season.

Car-sharing and independent contracting come with various options for car depreciation. While many independent contractors opt for the standard mileage deduction to calculate depreciation, there are other methods that might be more advantageous for some. Let’s delve into the two major alternatives: Actual Expense Depreciation and Section 179 Depreciation.

Standard Mileage Deduction

If you’re using your personal car for business purposes, the standard mileage deduction is a convenient way to write off your business-related expenses. For the year 2019, the standard mileage rate for cars, vans, pickups, and panel trucks stood at 58 cents per business mile. However, you can only claim this rate when you’re using the straight-line method to calculate depreciation.

Actual Expense Depreciation

This approach allows you to deduct the real costs associated with your business-related vehicle expenses. This includes expenses like fuel, maintenance, and other direct costs. If you opt for this method, it’s crucial to maintain records of these expenses. Keep your receipts or use digital expense-tracking software to catalogue them. Be sure to retain these records for a minimum of three years, as that’s the timeframe within which the IRS may conduct an audit. And remember, it’s always best to stick to the facts and avoid inflating your vehicle expenses to steer clear of IRS audit issues.

1099 Contractors

Independent contractors are required to provide proof of their income to qualify for certain tax considerations. If you operate as an independent contractor and your earnings from a single client exceed $600, they are obligated to furnish you with a 1099-MISC form. However, if you conduct your business through a third-party payment platform such as Airbnb, Turo, or Uber, you will receive a 1099-K only if your earnings surpass $20,000, and you engage in more than 200 transactions. Additionally, you must have an annual income exceeding $4,600 and be unable to carry out your regular occupation due to COVID-19 to meet specific criteria.

What Is Section 179?

Section 179 is a tax provision that offers potential savings for those looking to claim deductions on their 2019 taxes. Here’s a breakdown of what Section 179 is and how you can apply it:

Understanding Section 179 Deduction

Section 179 allows you to fully deduct the cost of acquiring a new business asset. For car-sharing enthusiasts, this means you can leverage Section 179 to deduct the expense of purchasing or leasing a new or used vehicle for your car-sharing business. This deduction not only reduces your taxable income but also trims down your tax bill.

Business Use Rules for Section 179

To qualify for a Section 179 vehicle deduction, you must put the vehicle into service for business purposes in the same tax year you intend to claim the deduction. This means if you plan to claim a Section 179 deduction in 2020, the vehicle should be in service between January 1st and December 31st of that year. Moreover, you must use the vehicle for business at least 50% of the time you drive it.

Failure to meet the 50% business use requirement during the 5-year period might necessitate repaying your Section 179 deductions and bonus depreciation. Keeping effective records of your business mileage is essential to avoid such complications.

Using Section 179 for Car Depreciation

Section 179 applies to both new and used vehicles, with the vehicle’s weight and type being the critical factors. The limits on Section 179 are more restrictive for passenger vehicles with a gross vehicle weight rating (GVWR) of 6,000 lbs or less. Most passenger cars, such as mid-size and compact models, fall into this category. In contrast, crossover vehicles, SUVs, trucks, and vans typically exceed the 6,000 lbs GVWR.

However, specific types of vehicles are exempt from the passenger vehicle limit, including,

• Ambulances or hearses are used exclusively for business purposes.
• Taxis, transport vans, and other for-hire vehicles used for people or property transportation.
• Vehicles specially modified for business use, like vans with rear seating removed.

Annual Limits

For the tax year 2018, the maximum Section 179 deduction for a vehicle weighing more than 6,000 lbs is $25,000 if the vehicle is put into service by December 31st. Starting in 2018, business owners can also invest in up to $2.5 million in Section 179 assets annually. This means you have the potential to purchase or lease multiple vehicles for your car-sharing business and claim deductions for several vehicles, provided your net business income allows for it.

How to Claim the Section 179 Deduction on Your Tax Return?

To accurately calculate your Section 179 deduction, you need to determine your vehicle’s Gross Vehicle Weight Rating (GVWR). This information is typically found on the manufacturer’s plate or sticker located in the driver’s side door of the vehicle.

To claim a Section 179 deduction on your tax return for the current tax year or for a carryover deduction from the previous year, you must complete and attach Form 4562, Depreciation and Amortization to your tax return. Make sure to sum up lines 9 and 10 and 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’ve recently acquired a heavy vehicle with a Gross Vehicle Weight Rating (GVWR) of 6,000 pounds or more and use it exclusively for business purposes, you can deduct 100% of its cost in one year. However, only heavy vehicles are eligible for this special deduction, and for the tax year 2019, the government raised the deduction limit to $1 million.

Example

To show how to claim a Section 179 vehicle deduction, let’s consider this example of a heavy vehicle with a GVWR of over 6,000 lbs:

Imagine you purchased an SUV for $40,000 and began using it on January 1, 2019. During the year, your car-sharing activities earned you $15,000 in income, and you used the vehicle for business purposes 70% of the time. Since your car-sharing is considered an income-producing business, you can claim 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. So, in this case, you can deduct 70% of the vehicle’s cost, which amounts to $28,000, from your taxable business income for the year. This results in a net loss of $12,000, which you can utilize to offset income from other sources, making it a valuable write-off for your car-sharing venture.

Modified Accelerated Cost Recovery System (MACRS)

The Modified Accelerated Cost Recovery System (MACRS) is an IRS-approved method for tax depreciation. It is applicable to vehicles placed in service after 1986. Under MACRS, cars are categorized as 5-year property, allowing you to spread the depreciation of a car, truck, or van over 5 years. You can choose one of the following methods to depreciate your vehicle:

1. 200% Declining Balance Method (200% DB): This method front-loads deductions during the initial years of recovery. If it offers equal or greater deductions, you are required to switch to the straight-line method.
2. 150% Declining Balance Method (150% DB): Like the 200% DB method, this approach maximizes deductions in the early years of recovery. If it yields equal or superior deductions, switching to the straight-line method is necessary.
3. Straight Line: The straight-line method provides consistent yearly deductions over the 5-year recovery period.

Special Depreciation Allowance

For vehicles put into service in 2015, you can claim an extra 50% special depreciation allowance. This is an additional deduction available after any Section 179 deduction and before calculating regular depreciation under MACRS. The special car depreciation allowance amounts to 50% of your total depreciation deduction.

Depreciation Limits

The IRS places limits on depreciation deductions for eligible vehicles. For 2019, these limits stand at $11,160 for cars and $11,560 for trucks and vans. You can also find the depreciation limits for 2020 in the relevant IRS documentation.

To report these deductions, use Schedule C (Form 1040), Line 13, and ensure you complete and attach Form 4562 as required.

Conclusion

In conclusion, understanding and utilizing car depreciation can be a significant advantage for 1099 contractors and car-sharers. It offers opportunities to reduce taxable income and potentially save money during tax season. However, the rules and methods can be difficult sometimes. If you’re still facing issues or have questions about car depreciation, don’t hesitate to reach out to our experts for guidance and support. They can help ensure you maximize your deductions while staying compliant with tax regulations.

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