It’s Always Important to Know the Rules of the Road
By Garrett Kelly, CPA
‘Can I deduct vehicle expenses on my tax return?’
This is one of the most frequent and open-ended questions a CPA will get. As a CPA, if you have been in the game for any period of time, you probably know that the answer is: “it depends.”
Here are some other commonly asked questions questions and scenarios regarding automobile deductions — and some answers.
‘I have a personal vehicle that I use in my business. Can I take an automobile deduction?’
Yes, if the vehicle is used in the business for business purposes, you are allowed a vehicle deduction. How you take the deduction, and receive the tax benefit, depends.
This is where a CPA can really add value. Maybe it should be a 100% write-off of the cost of the vehicle in the first year. However, many times the tax deduction comes in the form of a lease agreement, auto reimbursement from the company, or business mileage deduction.
“I bought a vehicle in my business that is used 100% for business purposes. How much can I deduct and/or depreciate?”
Weight and use of the vehicle matters. You can deduct the full cost of the vehicle. However, it is either 100% deductible in the first year, or it is deducted over multiple years. The answer depends on the weight and use of the vehicle.
An SUV or truck whose gross vehicle weight (GVW) is more than 6,000 pounds, or a special-use vehicle, can be 100% deducted in the year it is placed in service in the business. This is achieved through 100% bonus depreciation. A car, whose GVW is less than 6,000 pounds, is usually limited on how much can be deducted in the first year, resulting in the vehicle being depreciated/expensed over multiple years.
If your business owns a fleet, five or more vehicles that are used 100% in the business, you are able to fully deduct the purchased vehicle without consideration of the vehicle’s weight. This can be done through Sec. 179 expensing or 100% bonus depreciation.
This is just the tip of the iceberg, but it highlights the differences based on weight and use.
‘Should I deduct actual vehicle expenses or mileage?’
We typically lead with this follow up question: “is the vehicle expensive and/or do you drive a ton of business miles each year?” That’s not a very technical response but it gets the conversation started.
For example, in 2021 Mike purchases a $65,000 vehicle weighing more than 6,000 pounds that is used 100% for business purposes. Mike drove 30,000 business miles out of 30,000 total miles in 2021 and expects similar mileage in future years. He expects around $3,000 of vehicle expenses each year. He plans to utilize this vehicle in the business for another five years. We would recommend using actual-expense method in this situation.
A $65,000 deduction in the first year is about four times what the business mileage deduction would be in 2021 (see example below). It would take at least four years for Mike to achieve the same amount in tax write-offs. Not to mention the annual maintenance costs that are deductible each year under the actual expense method.
However, if this vehicle only cost $25,000, we would recommend deducting mileage. Yes, the actual method may achieve an additional $7,450 deduction in year one, but then Mike is limited to just deducting actual expenses in future years (around $3,000 a year). Mike is looking at around a $17,550 mileage deduction every year for the next 5 years, a total of $87,750 in write-offs, compared to a total $37,000 in write-offs with the actual expense method.
Now, all that being said, the IRS requires you to choose a vehicle-deduction method in the first year the vehicle is placed in service. If you choose to deduct actual expenses in the first year, you are stuck with this method for the life of that vehicle. If you choose mileage deduction the first year, you are able to switch to actual expense in later years.
‘What is the 2022 business mileage rate deduction?’
58.5 cents per business mile; 18 cents per mile for personal medical, military, and moving expenses; and 14 cents per mile for charitable driving.
‘I would like to start tracking and deducting my business mileage. What do you recommend?’
A logbook you keep in your vehicle is a classic method. If you have a smart phone, we recommend the app, TripLog. If you use QBO, then you have access to a free mileage tracker that you can access through your smartphone (see links below for details).
The IRS requires certain information when tracking mileage. Be sure you are recording the following:
• Beginning and ending destination;
• Business purpose of trip;
• Miles driven;
• Dates of trip;
• Odometer reading at the beginning and end of each tax year.
Hopefully this provides some insight into some of the more common questions on this often-confusing matter. Reach out to your tax advisor for more detailed information or individualized tax planning. Vehicle deductions are some of the largest tax deductions a business owner gets, and you want to be sure you are maximizing this tax write-off.
Garrett Kelly, CPA, Tax Manager, specializes in tax planning and compliance for residential and commercial real estate, pass-through entities, and family groups.