The tax implications of buying a vehicle for your small business

You may be able to take advantage of tax deductions by purchasing a car for your business.

Buying a car is an exciting purchase, but it can be particularly enjoyable when you purchase it for your small business. Whether you're buying a truck, van, sport utility vehicle or something smaller, a business-use motor vehicle can put you in the fast lane to growing your business by providing services – such as delivery – that you may have been unable to without a vehicle.

Aside from the money needed to buy a new or used vehicle, you may wonder about the tax implications and whether you can claim the purchase as a deduction. The short answer: yes you can, but there is a little bit more to it than that, both in terms of buying the vehicle and how you use it over the course of its life span.

Here are a few things to keep in mind, as detailed by the Australian Taxation Office:

Can claim full deduction only if car is for business-use only
Assuming you're registered for the goods and services tax (GST), you can claim the car you purchase as a business expense on your taxes. However, this option is only applicable if the vehicle will be used for purposes related exclusively to your business, such as delivery, house calls, work-related transportation and the like. It's important to keep your records and receipts organised, as you must corroborate the amount you paid for the car, whether it was brand new or previously owned.

Deduction amount depends on when car was purchased
How much you're eligible to write off from your tax obligations is largely influenced by when you bought the motor vehicle. Generally speaking, you can claim a deduction of approximately $5,000, provided it was purchased in the same year that you're filing your taxes. What you can claim afterward varies, depending on when and the cost of the car.

More due diligence required if car is also used for personal reasons
The easiest way to keep track of business use is, of course, if the motor vehicle is used strictly for business purposes. You may be able to claim the deduction if it's dual use, but it requires more logging on your part. For example, if 50% of the time you use the car for running personal errands and the other half for making deliveries, you'll need to substantiate that this is the case. You'll need some kind of logbook to keep track, making sure to jot down the following pieces of information:

  • The odometer reading at the start and end of the period you're tracking.
  • The total number of kilometres travelled.
  • Kilometres logged per trip if you took more than one in a 24-hour period.
  • The make, model, engine size and car registration number.
  • The actual percentage of time the car was used for business reasons.

You should also write down what the business use was, specifically.

Market value affects size of deduction
Generally speaking, as your car gets older, its valuation diminishes. As such, the amount that you can claim will largely depend on its model year.

May be able to claim deductions for using your own car for business purposes
Perhaps you're in a situation where you're taking advantage of the car you already own and using it for business purposes. You may be entitled to a deduction. Here are a few example scenarios of when this may be possible, per the ATO:

  • Going to work-related conferences or meetings that are away from your workplace.
  • Delivering or collecting supplies.
  • Travel between two different places of employment.
  • For itinerant work, meaning where travel is impossible to avoid for work to be completed.

One thing you can't claim are the costs associated with travelling between your home and your workplace, such as fuel. The reason being: This type of travel is considered to be private by the ATO.

Choose from two options for calculating deductions
Australian tax law gives you two choices for determining how much you can write off from your tax liability for car ownership or usage: Log book and cents per kilometre. As of 1 July, you can claim 72 cents per kilometre, but this amount may be different depending on the income year. For example, it is 66 cents per kilometre travelled for the 2017-2018 period. The number of kilometres you can claim is restricted to 5,000 total.

The logbook method is a bit more complex, as not only do you need to maintain a logbook for all the expenses you incurred over a given period, but you also have to calculate your business-use percentage. This can be done by recording what the odometer reads at the start and conclusion of 12 weeks and estimating what expenses were incurred over that time period. The Australian Tax Office has a calculator at its website that can help you figure out the numbers more easily and accurately.

From budgeting to strategic planning, WMC Accounting can make the management of virtually every aspect of your business easier. Contact us now and see how we can be of assistance.

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