Learn about the tax deductions available for purchased and leased vehicles that are used to earn business income.
Owning or leasing a vehicle to earn business income
Several factors are often considered when deciding whether to buy or lease a vehicle. Some common factors that are part of consumers’ decision-making process include:
- Preference to own your own vehicle and build-up equity
- Driving a new vehicle every couple of years
- Amount comparison between interest payments on a car loan and lease payments
For tax purposes, individuals who use their vehicle to earn business income can deduct certain operating expenses (for example, gas and repairs/maintenance) related to that vehicle. However, only the business-use percentage of the vehicle qualifies for the tax deduction.
Here we discuss the tax deduction rules for a purchased and leased vehicles by a business owner-manager.
Purchased vehicle
Vehicles costing $30,000 or less are eligible for the capital cost allowance (CCA - tax depreciation) deduction. An amount paid in excess of $30,000 does not qualify for the deduction. The declining balance method is used to calculate CCA with 15 percent of the vehicle cost deductible in the year of purchase. In subsequent years 30 percent of the undepreciated capital cost (UCC) can be written off. Keep in mind the CCA claim is limited to the percentage the vehicle is used to earn income.
Example:
Katherine purchased a car costing $30,000. This vehicle qualifies under CCA class 10 that has a rate of 30 percent. Katherine drove the car for a total of 20,000 km during the year; $15,000 kilometers were driven to earn business income. CCA is calculated as follows:
Year 1 (year of purchase): $30,000 X 15% = $4,500
CCA deduction limited to business use: 4,500 X (15,000/20,000) = $3,375
Year 2: ($30,000 - $4,500) X 30% = $7,650
CCA deduction limited to business use: 7,650 X (15,000/20,000) = $5,737.50
In addition, if you take out a loan to purchase the vehicle, you can deduct interest payments up to a maximum amount of $300 per month.
Leased vehicle
The monthly car lease payments are deductible up to a limit of $800. However, lease costs are prorated for vehicles costing more than $30,000.
Similar to the CCA deduction, the down payment made on a lease cannot be deducted as a lump sum amount. Instead, the amount is added to monthly lease payments and deducted over the years. Again, only the percentage of the lease payments that relate to business use is deductible.
For professional accounting and tax advice contact Alpha Accountzy, Accounting & Tax Solutions.
