Why Is It That…?

Tax season is over, and now cleanup begins. I’ve had my nap, my ‘recharge’ day, and a chance to regroup a little, and now it’s time to get back on track!

Speaking of, I’M BACK!

It’s been weeks since I wrote, months even, and I’ve truly missed it. As well, since it’s been so long, I was having trouble deciding WHAT to write about! Go figure, but I’m sure you’ve experienced the same thing in different ways.

So I thought,

How about addressing some questions that I was asked during tax season? Easy questions? Yes, but not always easy answers. With tax laws and regulations changing almost daily, it’s hard to keep up with all the information we all need to know.

And you know what? I’m leaving that up to your accountant! (If I’m your accountant, then we’ll deal with that elsewhere!)

This is absolutely NOT meant to be tax advice, but a simple definition of a general practice, so that you are a little more aware, and a little less surprised, at tax time next year.

Would you do me a favor? If you like my explanation, would you let me know. This is a test blog to see if I should develop a simple Q & A page. If I get a favorable response, I’ll do just that.

Okay, here’s the question –

Why is it I don’t get to deduct my whole car payment for auto and truck expense for my business?

Answer –

Here’s how it works. You buy a car. You don’t have $25,000 in the bank to pay cash for it, so you take out a car loan, and pay it back in installments over 48, 60 or 72 months. You make 48, 60 or 72 equal payments over that time. Each payment contains two things – part of the original loan you took out, and part of it interest you are paying for the use of that money over time. (The bank’s ‘profit’ on the loan, if you will.)

Did you declare that $25,000 as income on your tax return? No, of course not. It’s not income, it’s a loan. If the money you got to pay for the car is not income, then the return of it is not expense. Therefore, no deduction for the ‘principal,’ or the original amount you borrowed.

However, the interest you pay, which is actually taxable ‘profit’ to the bank or financial institution, IS deductible, because it is a COST to you. The bank declares the income in the course of business, and because of that, you get to deduct the portion of interest you pay in direct proportion to the percentage of time you use the car for business. If the business owns the car, generally all of the interest is deductible. If you own the car personally, and own your own business, you can only deduct a portion of the interest as a tax deduction.

In summary, principal is the original loan amount and NOT deductible (since it’s not taxable income to you, or taxable expense to anyone else,) and the interest you pay on it IS deductible to the extent you use the car for business purposes.

I hope this helps!

And it’s great to be back!

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2 Responses to Why Is It That…?

  1. Jamie says:

    Thanks for answering that nagging car payment question!! Each year I wonder the same thing and now I think you’ve answered it clearly enough that I won’t wonder any longer! But, can I still WISH that I could deduct the whole payment??????!!
    You rock Jet!!

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