Tax Consequences of Buying a Vehicle

For every business owner, there comes a time when the old vehicle will no longer suffice. Or, perhaps this is the year that you need a special purpose vehicle such as a delivery truck or van.

At some point, nearly every business owner will have to consider purchasing, leasing, or otherwise obtaining a vehicle. Before you purchase a vehicle, becoming familiar with the following tax matters may help you save money:

• Excise taxes may be imposed on the vehicle that you purchase.
• Alternative-fuel vehicles such as hybrid cars and plug-in electric vehicles may be eligible for special tax breaks.
• The expensing election may allow you to deduct a portion of the cost of a vehicle placed in service during the year.

If you bought a vehicle in 2012, keep two things in mind. First, if you bought a car for personal use, you may be able to deduct the state and local sales tax imposed on the purchase as an additional itemized deduction. Second, if you bought a vehicle for business, both the expensing election and bonus depreciation are available to increase the amount deductible for depreciation for the 2012 tax year.

Once you've made the decision that you need a vehicle for your business, our first recommendation is that you try to conserve your capital by converting a vehicle you already own to partial or full-time use in your business. Remember this: vehicles generally depreciate in value and are poor investments in and of themselves. If you are the owner of a new business, whatever capital you have should be put into the things that will most directly generate revenue - and that usually won't include a new car.