Tax Breaks for Buying a Car

Buying a new vehicle for your business may sound expensive, but it's important to keep in mind the possible tax advantages. And you may receive valuable tax credits for buying particular types of vehicles.

Be sure to save all the receipts from any vehicle purchases so you can get all qualified deductions.

Sales Tax Deduction

The American Recovery and Reinvestment Act signed in February 2009 expanded the tax write-offs for new-car buyers. First off, if you buy a new car or truck, you can deduct all the sales or excise taxes you paid on the vehicle on your federal income tax return. Even taxpayers who don't itemize can take this deduction.

There is a limit on how much sales tax you can deduct. It cuts off at a purchase price of $49,500. If you make more than $125,000 in adjusted gross income, or $250,000 for a married couple, the deduction begins to phase out. The amount you save will vary depending on your state sales tax rate. For instance, if your state tax rate is 6 percent and you buy a $40,000 car, your deduction would be $2,400.

This tax break went into effect Feb. 17, 2009, and expires at the end of the year. Note this one applies to new cars only.

Depreciation

Not only can you deduct the sales tax on your new car, but you can also write off a substantial chunk of a vehicle's purchase price in the first year. For cars, the first-year depreciation allowed jumped from $2,960 in 2008 to $10,960 for 2009. Similarly, vans and light truck purchases bring an $11,160 first-year deduction, up from $3,160. Better yet, this deduction works for both used and new cars.

If your business has been doing well, purchasing a vehicle in 2009 could allow you to substantially reduce your net income, allowing you to pay less federal income tax.

Fuel-Efficient Vehicles

If you buy particular models of hybrid gas-electric vehicles, you can get an additional tax credit. The models change each year. For instance, in 2009, buying a Ford Escape hybrid two-wheel-drive car or a Mazda Tribute hybrid 2WD nets you a $3,000 tax credit. Remember, a credit is better than a deduction, as it's a dollar-for-dollar reduction of the tax you owe. The Internal Revenue Service provides a complete list of qualifying vehicles year by year.

Electric Cars

If you purchase an all-electric vehicle, the kind that recharges by being plugged into an electrical outlet, you can get a credit of at least $2,500, thanks to the ARRA. Vehicles with more capacity to run on a single charge get a bigger credit, as much as $7,500 for vehicles that can run 16 kilowatt hours on a single charge.

State Breaks

In an attempt to stimulate their economy, some states have offered their own tax breaks on vehicle purchases, so be sure to check your state laws on vehicle purchases. For instance, Washington purchasers of hybrid gas-electric vehicles currently pay no state sales tax.

Business reporter Carol Tice contributes to several national and regional business publications.