First and foremost, remember the auto deduction isn’t travel, but expenses for your car, truck or SUV. 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)!
Next, the law changed Big Time with the Tax Cuts and Jobs Act (TCJA) and from 2018 through 2023 the auto/truck/suv deduction is Amazing!! Things got a lot better for business owners with cars/autos…if not AT LEAST you have a lot more options. You can actually write-off a vehicle at lot faster and with bigger deductions!
However, the big question that is always in my conversation with clients, which strategy is best: Mileage or Actual expenses. It’s not an easy question and lots of variables. Below I list 7 general rules that will help guide you through the decision process. But first, it’s important you understand these 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 2019 your mileage deductions are as follows:
- Business – 58 cents a mile
- Charity – 14 cents a mile
- Medical and Moving – 20 cents a mile
- Personal or Commuting – NO DEDUCTION
In the past, 90% of our clients used the mileage method because it’s SIMPLE, EASY and a LARGE deduction, but now its a whole new ball game!! Keep in mind almost every situation with business owning taxpayers will vary and several MAJOR factors will impact the analysis.
- 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 IN THE PAST is that because of limits imposed back in the 1980s your depreciation deduction was ridiculously low. For example, if you bought a $40,000 car and drove it 100% for business, your maximum deductions for the first five years would only be $15,060. To fully depreciate the car would take 19 years!! Are you kidding me?!!
Now with the Tax Cuts and Jobs Act we have two INCREDIBLE changes that benefit the small business owner:
- Higher annual depreciation limits
- Bonus depreciation
HIGHER Deprecation – Under the new law, the limits are dramatically increased, whether it’s new or used. In fact, you can convert a personal car to business and take the same depreciation amounts (you don’t have to buy a new or used car to start depreciation and actual expenses. This is also assuming you don’t use the mileage method…something I analyze more fully below. The new annual limits are:
- Year 1 – $10,000
- Year 2 – $16,000
- Year 3 – $9,600
- Year 4, and each subsequent year – $5,760
So when you buy that $40,000 car in 2018 through 2023 (compare the example above), you can actually write-off 89% of the car in the first 3 years, PLUS fuel, repairs, maintenance, etc… That’s well over 80,000 in miles if you were to use the mileage method!!
BONUS Depreciation – Also, under the new law, we get a perk if we go out and buy a new OR USED car. That’s right. It doesn’t have to be ‘brand’ new, just new to you. This ‘Bonus’ is to stimulate the economy. The bonus depreciation is $8,000 and comes off the top! Here’s the math:
- $40,000 vehicle
- -$8,000 bonus depreciation
- $32,000 basis for standard deprecation, which will NOW BE FULLY depreciated in the first 3 years!
So what method is best for You – Actual or Mileage? This is where it gets tricky. There are lots of issues to consider:
- The miles per gallon (MPG) on the vehicle
- Bonus depreciation if a new purchase
- Total repairs or expected repairs and maintenance
- How many miles you expect to put on the vehicle
- and of course, HOW MUCH will this car cost
Nonetheless, we’ve discovered some ‘general rules/guidelines’ that can at least be a starting point for a discussion and possibly point a client of ours in the right direction while they are shopping for a car, truck or SUV.
- Rule #1 – If you are going to put on A LOT of business miles, and the car is generally a lower purchase cost then the Mileage Method is going to win.
- Rule #2 – If you’re NOT going to have a lot of business miles, and it’s an average cost vehicle used exclusively or primarily for business, then you will lean towards the Actual Method.
- Rule #3 – If your NOT going to have a lot of business miles, and it’s a more expensive car used exclusively or primarily for business, you should consider leasing and the Actual Method. You’ll have lower monthly payments making a better economic decision.
- Rule #4 – If you are going to have low miles and it’s a lower cost vehicle used primarily or exclusively for business, I would still lean towards the Actual Method because the miles won’t give you the benefit compared to at least some type of depreciation.
- Rule #5 – If you are going to use your car part-time for business because you have a day job, you will typically use Mileage Method. The reason being is that you have to show at least 50% business use in order to utilize the actual method.
- Rule #6 – If you are going to buy a 6,000lb or more SUV or truck, you will generally lean towards the Actual Method because you are going to have a lower MPG pushing up your actual costs and bonus depreciation is 100 percent. In other words, you can possibly write off entire vehicle in the first year.
- Rule #7 – If you have a high MPG (think hybrid or electric), but still have average use and miles, you will lean towards the Mileage Method because your operating costs are going to be much lower generally.
** Again, keep in mind these are just general observations and considerations and you need to consider all the facts of your situation with your tax advisor before choosing a method.
No matter what method you choose, keep in mind a SPECIAL NOTE—Tracking Mileage. It’s important you ALWAYS track your mileage (or estimate it as best as you honestly and ethically can) because it will determine your ‘business use percentage’ for the actual method AND of course you mileage deduction if you are using the mileage method. 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)!!
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.
- The drawback isn’t a surprise for those that have leased a vehicle before—the mileage limitations by the manufacturer/dealer 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!!
- The Benefit of Leasing is 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.
* To sign up for Mark’s weekly Free E-Newsletter and receive his Free E-Book “The Top 10 Best Tax Saving Secrets Everyone Should Know” visit www.markjkohler.com.
Mark J. Kohler is a CPA, Attorney, co-host of the Radio Show “Refresh Your Wealth” and author of the new book “The Business Owner’s Guide to Financial Freedom- What Wall Street isn’t Telling You” and, “The Tax and Legal Playbook- Game Changing Solutions For Your Small Business Questions”. He is also a partner at the law firm Kyler Kohler Ostermiller & Sorensen, LLP and the accounting firm K&E CPAs, LLP.