Can I write off a car that will be used for reverse engineering and product testing?

Question

I am an electrical engineering consultant (self employed) helping a client develop an accessory for Electric Vehicles. I need to have an EV to reverse engineer some of the protocols, and to test prototypes on. It would be used for some amount of business related driving, but it would also be used for normal stuff (getting kids to school, groceries, etc.) and I'd want to keep it when the product development is complete (though there may be future products that use it as well).

For development so far I've used borrowed cars and rentals, which isn't ideal.

Since my primary business reason for buying the car would not be driving it, but testing on it, does that change anything for writing it off? For example, if I was buying some other machine to reverse engineer, car stuff wouldn't even be relevant. But I realize I am muddying things by driving it.

If I can write it off, how much can I write off? It sounds like cars have to be written off over the course of several years. Does that apply here as well? (If I had my way, I'd love to write the whole thing off this year.)

I'm not looking for specifics, just trying to see if I can justify the purchase, and whether I can reasonably use some of the money I have set aside for taxes to cover the cost. Thanks!

Update to clarify some things: First, perhaps "reverse engineering" has a negative connotation, but what I am doing isn't illegal, or even frowned upon. It's completely reasonable in this context. Let me give an example. Let's say I am designing a power adapter for a laptop (a reasonable thing for an engineer to do), but the manufacturer chose not to publish the specifications of their adapter. So I buy a laptop and an adapter, I measure the size of the connector and the voltage, then I make my own adapter using that information and plug it into the laptop to make sure it works. This cannot be done reasonably without buying the laptop and adapter. So it seems that buying those things would be a business expense (in my mind at least. I'm not sure if tax law agrees, which is why I am here).

That's what I am doing, but with an EV.

So to apply that to my actual situation. I am making an accessory for an EV that can not reasonably be made without having access to an EV. If I buy the car and never drive it, but use it only for taking measurements from and for testing my product on, it sounds like that would be something I could write off, is that correct? In that case, since it is not actually being used to move people or goods, it seems (to me at least, see disclaimer above) that maybe the normal car rules wouldn't apply, as I'm not, in this case, using it as a car, but just a piece of machinery to be interfaced with. To be clear, the primary impetus for buying the car is not to drive it at all.

Now, to continue my earlier example, if I legitimately need to buy this laptop to develop the adapter, then when I am done with development, what happens? Do I need to leave it untouched or throw it away lest I risk the wrath of the IRS? In the case or the laptop or the EV, it seems that not using it after development was done would be pointlessly wasteful.

Perhaps the answer here is that I can't write it off because that's the sort of thing that people would be too likely to abuse (like how, for the same reason, I can't write off the lost income from clients who don't pay, if I understand correctly). Fair enough, that's what I asked this question to learn. I am not trying to do anything nefarious here (if I were, I wouldn't be asking, would I?), but I do want to take advantage of opportunities to reduce my taxes if they legally, reasonably available.

Answer 1

I need to have an EV to reverse engineer some of the protocols, and to test prototypes on. It would be used for some amount of business related driving, but it would also be used for normal stuff (getting kids to school, groceries, etc.) and I'd want to keep it when the product development is complete (though there may be future products that use it as well).

When a business is planning on claiming an item as a business expense, but also has a plan for personal use of the item, their accountant and their tax advisor get nervous. This is true when the item is low cost, but they get really concerned when the item costs tens of thousands of dollars.

Getting this wrong can cost you a lot in taxes and penalties. If the IRS audits you, and determines that the EV was improperly claimed as a business expense, it can get very expensive.

For development so far I've used borrowed cars and rentals, which isn't ideal.

I assume you told the owners what you were doing, but did you tell the rental company? They might have had concerns.

For example, if I was buying some other machine to reverse engineer, car stuff wouldn't even be relevant. But I realize I am muddying things by driving it.

People have been looking for this type of loophole. The ability to treat a non-business expense as a business expense seems like a good way to save money. People buy a business laptop, but then they use it for non-business things.

If I can write it off, how much can I write off? It sounds like cars have to be written off over the course of several years. Does that apply here as well? (If I had my way, I'd love to write the whole thing off this year.)

Talk to your tax advisor. With this much money at risk you need a tax advisor.

Answer 2

From what you're describing the primary use of the car would be for personal use. You can maintain a contemporary record of miles driven for business and prorate expenses accordingly.

It's not clear what you mean by "reverse engineer". Generally, expenses for illegal activity are not deductible.

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To expand a little on your clarifications and comments:

It doesn't matter to me what you're doing and whether it is legal. I'm not a lawyer and can't form an educated opinion on the matter. What I do know that if you are doing something illegal - then you cannot take a business deduction for the expenses related to that. So talk to a lawyer about your business with that in mind.

As to deducting business expenses - if you buy a car that never drives and you use it solely for your business, then yes, you can claim it as a business asset. Such assets are usually not deducted as an single-purchase expense but rather depreciated over time. There are some additional rules that may change the general depreciation requirement, check with your tax advisor.

However, if you are driving the car, then you need to prorate business and personal use, and only deduct the portion attributable to the business use. So if the odometer changes between the purchase and the disposal of the car and you didn't only drive it for business needs - you'll have to prorate based on the actual driven miles.

It's even worse with laptops - you bought a laptop to measure it's voltage, and that's all you need for your business. But you then used the laptop for a personal use to check your email or whats not - you cannot deduct the laptop as a business expense. It's your personal laptop.

You're not the first to buy something "for business" and "only slightly use for myself".

As to your comment that you cannot deduct money you haven't been paid - you cannot deduct it because it's not an expense. You didn't lose anything since you never had it to begin with (if you're a cash based taxpayer). Had you had it, you'd pay tax on it. Since you never got it - there's no tax to pay. Why would you expect to double dip and also take a deduction?

Answer 3

If you're contemplating having your business buy something as expensive as a car, particularly where you are doing unusual things with that car, it is time to have a conversation with a tax professional who can stand behind you if you are audited.

The immediate problem is that the IRS has a standard approach for cars that are used for both business and personal use. You simply log the miles you use for business and you can deduct that fraction of the car. But in your case, you'd not be driving the car for business purposes but you would be driving it for personal purposes. So if you want to deduct anything, you'd be outside the realm of "normal" car expensing rules. Hence the need for a tax professional.

A plausible scenario would be to have the business buy the car, do whatever testing you need to do, and then convert the car to 100% personal use by buying the car from the business at the fair market value of the car at the time (which may create a taxable gain if you buy the car from the business in a different tax year). If you're expecting that it's going to take months or years to do whatever analysis you need to do, the difference in fair market value might be enough to be worth the hassle of trying to deduct the difference. If you're expecting that it is going to take days or a weeks to do this analysis, it is unlikely that the fair market value of the car would change meaningfully so there would be no expense for the business to recognize.