First and foremost, remember the auto deduction isn’t travel, but expenses for your car or truck. Also, remember this includes ALL your vehicles as long as they have some sort of business use, i.e. an RV, van, delivery truck or motorcycle used in your business (more articles to come)!
There are TWO MAIN OPTIONS to write off auto expenses and it all starts here!!
- Mileage. On ANY of your vehicles you can use mileage as an EXCELLENT method to expense the business use of your vehicle. In 2016 your mileage deductions are as follows:
- Business – .54/mile
- Charity – .14/mile
- Medical and Moving – .19/mile
- Personal or Commuting – NO DEDUCTION
90 percent of our clients use mileage because it’s SIMPLE, EASY and a LARGE deduction, but keep in mind almost every situation with business owning taxpayers will vary and several MAJOR factors will impact the analysis. Consider the following:
- The miles per gallon (MPG) on the vehicle
- Bonus depreciation if a NEW car purchase
- Total repairs or expected repairs and maintenance
If it is a NEW purchase, you may want to go with the Actual Method and get some bonus depreciation in the year you purchase, or maybe with a truck, van, SUV or RV you could even get more depreciation expense. However, most of our clients find the mileage deduction to be ultimately the best long-term decision when it comes to cars.
SPECIAL NOTE—Tracking Mileage. It’s important you do your best to track your mileage. It can be a written record, but I also have partnered with Deductr to create my own Tax Planning and Tracking Smart Phone Application (this link gives you a 50 percent discount from the App Store)!!
- Actual Expenses. The second method in deducting automobile expenses is by using the actual expenses for the vehicle. When you use this method you CANNOT use mileage. Essentially, you track your fuel, repairs, maintenance, insurance, tires and then also “depreciate” the vehicle or a portion of the lease payment if leasing.
The PROBLEM with actual is that depreciation expenses are drastically limited for cars, somewhat better in the year of purchase for a 6,000lb vehicle and then only really opens up for large trucks, vans and RVs in certain instances.
So this is where things get crazy. You have to consider issues such as the size of the vehicle, did you buy it this year (regardless of whether it was new or used), are you leasing, how much do you actually use it for business versus personal?… ALL OF THESE FACTORS play into your analysis as to what your deduction may be and if it is better than mileage.
Here are a few Special Circumstance Vehicles in this area of “actual expenses.”
SUV or Truck with Less than 6’ Bed. Both of these vehicles are treated the same. Yes, some of these trucks are more like an SUV when they have the two-row seating and a short bed. Thus, the IRS says they are treated the same for tax purposes.
- So the special rules essentially state that you can take the business use percentage of all actual expenses (fuel, repairs, maintenance, etc.) and some depreciation expenses. For example, if you have $10,000 in annual expenses and depreciation and it’s used 80 percent for business. Thus, you are allowed an $8,000 deduction.
- However, the allowable depreciation is still not fantastic, but it is better than a car. So if you buy a new SUV or truck (which could be “used”, but new to you), you’re allowed to take up to $25,000 of depreciation right of the top. This little $25,000 write-off is often a perfect fit for a business owner looking for one of these types of vehicles and can exceed the mileage deduction.
Large Trucks and Vans. If the truck or van is over 6,000 pounds and the truck has a 6 foot bed or greater or is an enclosed delivery truck, then the $25,000 SUV limitation in the year of purchase for deprecation DOES NOT apply. In fact, you can deduct up to $500,000 in the year of purchase for the cost of the vehicle (limited to the business use percentage of the Truck or Van). Of course, there a number of other variables, but it is a common and often used deduction by small business owners. Moreover, any remaining basis unused with the 179 deduction, can then be depreciated in years to come in conjunction with the actual expenses of the vehicle.
Amazing Benefits of 179 Deduction. Bottom line, if you are in the business of buying a truck, Van, or RV, it’s critical you understand the 179 deduction and what it entails. Here is a fantastic article from DeltaModTech with an in depth analysis and audio interview with me as well. Check it out here!
Leased Vehicles. Leasing is a phenomenal deduction, but not without its drawbacks. The tax benefits are phenomenal. You can again take all the actual expenses, including the lease payment (based on your business use percentage) and also save on the cost of a luxury car when monthly payments may be cheaper when leasing.
– However, the drawback isn’t a surprise for those that have leased a vehicle before—the mileage limitations can really bite you in the end. For example, if you are only allowed 15,000 miles annually under the lease, when you turn in the vehicle at the end of the leasing period, you have to pay for every mile you went over—buckle up!!
– I find the leased vehicle is best for those that want a second car, and maybe something a little nicer, to take clients and customers out to lunch in and make sales calls. When a client has another vehicle for personal or business use where they can be indiscriminate with miles and rack them up when needed, and NOT on the leased vehicle, then leasing may be a perfect fit for that second vehicle.
Bottom line, I suggest you create a spreadsheet to analyze the situation. It doesn’t have to be complex either. Just think through your options AND realize that if you are going to spend THOUSANDS OF DOLLARS on this vehicle, it’s valuable to take a few minutes to analyze the various tax deduction options. Establish columns to compare mileage, to purchase, to lease, and then your rows can be different types of vehicles and different scenarios. You can do some initial research and calculations by simply pulling information off the web and then have your accountant/tax preparer fine tune your analysis!! It could save you A LOT of money to go through this analysis and process.
Mark J. Kohler is a CPA, Attorney, Radio Show host and author of the new book “The Tax and Legal Playbook- Game Changing Solutions For Your Small Business Questions” and “What Your CPA Isn’t Telling You- Life Changing Tax Strategies”. He is also a partner at the law firm Kyler Kohler Ostermiller & Sorensen, LLP and the accounting firm K&E CPAs, LLP. For more information visit him at www.markjkohler.com.