As a car dealership, we get these questions a lot:
- Are car finance payments tax-deductible?
- Can you write off interest on a car loan?
- Is auto loan interest tax-deductible?
- How do I know what car loan expenses to deduct from my taxes?
The answers to these questions vary depending on your vehicle usage.
Understanding what expenses are tax-deductible is critical in maximising savings on your taxes. Read on to learn more the answer to “Is car loan interest tax-deductible?” and other related questions about auto tax deductions.
How to Determine If Car Finance Payments are Tax-Deductible In Australia
Typically, you can only deduct car payments from your tax return if you use the car for business uses. As a result, you can’t benefit from any deductions for vehicles you use solely for personal reasons.
Additionally, you typically cannot deduct the entire car loan or lease payment from your taxes. Instead, you can only deduct the interest on your car payment, along with other related expenses.
However, there are numerous business-related cases in which you could potentially deduct car payment interest from your Australian taxes. Here are a few typical instances in which this interest may be tax-deductible:
You Are a Business Owner and Use Your Vehicle Solely For Business Purposes
The most straightforward instance in which you could deduct your car payment interest from your taxes is if you are a business owner who uses your vehicle explicitly for business purposes.
For instance, let’s say you own a contracting business, and you drive your work vehicle from appointment to appointment. At the end of the day, you park your work vehicle at your business, then drive your personal vehicle home.
In this case, you could claim the car payment interest and all related expenses on your taxes.
You Use a Vehicle Partially for Business Use and Partially for Private Use
If you finance a car that you use partially for business purposes and otherwise for personal use, you can claim part of the vehicle’s expenses on your taxes. However, you’ll need to correctly identify the percentage of the total vehicle use that is business use.
The best way to keep track of the car’s business usage is to keep a logbook or diary of your activity with the vehicle. For example, you can track your mileage at the beginning of the workday and at the end of the workday to determine the number of miles you traveled for business use.
Note: According to the Australian government, traveling back and forth from your place of business is considered private use. The only exception to this policy is if you work from home and travel to other locations for business purposes.
You Are a Business Owner Who Provides Vehicles to Employees
If you own a business and provide work vehicles to employees, you can claim these vehicles on your taxes. However, you will need to specify whether the employees use these vehicles solely for work purposes or if they also utilise them for personal reasons.
What Car Expenses Can You Deduct From Your Taxes?
While you typically cannot deduct an entire auto payment from your Australian taxes, you can deduct several related expenses. Here are the business auto expenses the Australian government allows you to deduct from taxes:
- Depreciation (decline in value)
- Fuel and oil
- Insurance cover premiums
- Interest on an auto loan
- Lease payments
- Registration
Calculating Business Motor Vehicle Expenses
As we mentioned earlier, if you use your vehicle for business and personal use, you’ll need to calculate your usage percentage for business purposes to determine how much to deduct.
As a result, you’ll want to calculate the business motor vehicle expenses accurately. The Australian government allows you to use a few different methods to calculate these expenses:
- Cents per kilometre method: This method uses a set rate for every kilometre you travel for business reasons, with a maximum of 5,000 business kilometres per car each year. You can review the current rate on the Australian Taxation Office website.
- Logbook method: This method invites you to keep a logbook of your vehicle activity to determine the percentage travelled for business reasons. In this method, you would track your distance travelled for personal and business reasons, then divide the business use distance by the total distance. This percentage can help you determine the exact expenses to deduct from your business taxes.
- Actual costs method: This method requires you to calculate the actual costs of your business vehicle expenses based on receipts. If you use your vehicle for shared use, you can utilise the logbook method to determine the percentage of these costs to deduct.
If you own a sole trader or partnership and are claiming a car, you can use the cents per kilometre or the logbook method. However, if you own a company or trust or are claiming a vehicle other than a car, you must use the actual costs method.
Other Tax Benefits for Car Loans
Within the past few years, the Australian government has begun offering $150,000 in tax rebates for small business owners who purchase vehicles for business use. Any business with a turnover of $500 million or less can deduct the cost of their business vehicles and other assets from their business taxes.
However, as with the other tax deductions we’ve mentioned, you’ll need to specify whether you use the vehicle solely for business use or also for personal use. If you use the car for personal reasons, you can only deduct the percentage of the car’s cost equivalent to your business usage.
Bottom Line
Altogether, if you use your vehicle for business purposes, you can deduct a portion of its expenses from your taxes. The exact amount you can deduct depends on the amount of time that you use the vehicle for business purposes.
Now that you know these tax deduction guidelines, you can purchase your business vehicle with confidence. Contact our Westside Auto Wholesale team today to learn about our auto financing options.
