Page 37 - BusinessWest June 27, 2022

Auto-deduction Questions, Answers
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 ques- tions 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 busi- ness 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 deduc- tion comes in the form of a lease agreement, auto reimbursement from the company, or business mile- age 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 deprecia- tion. A car, whose GVW is less than 6,000 pounds, is usually limited on how much can be deducted in the first year, result- ing 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 anoth- er 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 mainte- nance 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.
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ACCOUNTING & TAX PLANNING
JUNE 27, 2022 37
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
Vehicle
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