Deducting your vehicle
April 13, 2019
What is the vehicle deduction? The vehicle deduction is simply a business-related tax deduction for your vehicle. This deduction includes all of your vehicles that have a business use, including your car, truck or motorcycle when used in your business.
The Tax Cuts and Jobs Act (TCJA) changed things and from 2018 through 2023 the vehicle deduction is now unbelievable! Starting with your 2018 tax filing, you can write-off a vehicle at lot faster with bigger deductions.
That being said, the questions my client's want answered are, "which strategy will work best for them?" And, "should I use the actual or mileage expense method?" These are not always simple questions to answer as there are variables to consider.
Here are two main methods used to write off your vehicle expenses.
1. Mileage. Using the standard mileage method is a great way to deduct the business use of your vehicle. For the 2019 tax year the mileage deductions are as follows:
• Business activity at 58 cents a mile
• Charitable activity at 14 cents a mile
• Medical and Moving is 20 cents a mile
• Personal or Commuting to Work – NOT DEDUCTABLE
90 percent of my clients have been using the mileage method because it's simple and easy. The miles can add up fast making it a nice deduction, but now things have changed. It's not a cookie cutter decision anymore. Business owners need to consider several factors that will impact their choice.
2. Actual Expenses. This method of deducting vehicle expenses is by tracking the actual expenses you incur. When using this method, you cannot use mileage. You add up all of your costs for fuel, repairs, maintenance, insurance, etc. and also "depreciate" the purchase price of the vehicle or (if you are leasing) deduct part of the lease payment.
Previously, the limits allowed on your depreciation deduction were extremely low. For example, if you buy a $40,000 car and drive it exclusively for business, your total deductions for the first five years would add up to $15,060. It would take 19 years to fully depreciate the car.
Now, there are two big changes that benefit the small business owner with the Tax Cuts and Jobs Act:
• Higher annual depreciation limits
• Bonus depreciation
Higher Deprecation – Under the new law, the limits are radically increased. Whether it's new or used doesn't matter. In fact, you don't have to buy anything to start depreciation using the actual expenses method, an existing personal vehicle can be converted to business use.
The new limits are:
• Year 1 – $10,000
• Year 2 – $16,000
• Year 3 – $9,600
• Year 4, and each year after – $5,760
So, now you can write-off 89 percent of a car in the first three years, plus fuel, repairs, maintenance, etc. For a $40K vehicle that would equate to over 80,000 in miles if you were to use the mileage method.
Bonus Depreciation – The "Bonus" was designed to stimulate the economy. The bonus depreciation comes off the top and is $8,000! And, great news, it can be a new or used vehicle.
Here's how it works:
• $40,000 vehicle
• ($8,000) bonus depreciation
• $32,000 basis for standard depreciation, which will be fully depreciated in the first three years.
So, which is best for your situation? The Actual or Mileage Method? You will want to do some figuring as there are many things to consider:
• The fuel economy of the vehicle
• Bonus depreciation if it's a new purchase
• The total of expected repairs and maintenance
• Total miles you will put on the vehicle
• Purchase price of the vehicle
Here are some guidelines that can start the discussion and help direct you to make the right decision.
No. 1 – If you put a lot of business miles on the vehicle, and it is generally a lower purchase price then the Mileage Method is going to win.
No. 2 – If you don't put on a lot of business miles, and it's an average cost vehicle, then the Actual Method will probably work best for you.
No. 3 – If you're not going to have many business-related miles, and it's a more expensive car, you might consider leasing and then using the Actual Method. Your monthly payments will be lower making an overall better economic decision.
No. 4 – If you are going to drive less miles and it's a lower purchase price, I would lean towards the Actual Method. The low number of miles probably won't give you the benefit when compared to depreciation.
No. 5 – If you are going to use your car part-time for business, you will typically use the Mileage Method. The main reason is that you have to show at least 50 percent of business use in order to utilize the Actual Method.
No. 6 – If you are going to buy a truck or SUV that is 6,000-pounds or more, you will be back to the Actual Method because the lower fuel economy will increase your actual costs and the bonus depreciation is 100 percent. That means, you may be able to write off the entire vehicle in the first year.
No. 7 – With a high fuel economy vehicle, but low or average use and miles, you will lean towards the Mileage Method. Your operating costs should be much lower.
Remember, these are just general things to consider. You need to meet with your tax advisor and consider all the facts of your situation before choosing a method.
Always track your mileage with either method as it will determine your 'business use percentage' for the Actual Method and your mileage deduction if you are using the Mileage Method. It can be written down in a log book or you can use one of the many mileage tracking apps on your phone.
Leased Vehicles. Leasing can be an amazing deduction for business owners, but there may be drawbacks. The tax benefits are great. You can take all the actual expenses, including the lease payment (based on your percentage of business use) and save on the cost of a luxury car when monthly payments may be cheaper by leasing.
For those that have not leased a vehicle before, the mileage limitations imposed by the manufacturer maybe a drawback. They can hurt you in the end if you go over your limit. Under your lease agreement you are allowed a certain number of miles annually. You will pay for every additional mile you go over when turn in your vehicle at the end of the lease period. If you are not careful, those extra miles can add up fast!
The advantage of leasing is for those that want a second car, but don't plan on putting on a lot of miles. When you have another vehicle available for personal or business use and you can control the miles on your leased vehicle, then leasing may make sense for that second vehicle.
So before making a decision, get with your tax advisor and do some planning to make sure you are maximizing your deductions. You will be glad you did!
Jay Thompson is a Business Consultant with the CSU Bakersfield Small Business Development Center. The CSUB SBDC provides premium, one on one, no cost consulting to small business owners in Kern, Inyo and Mono Counties. For more information visit their website at www.csubsbdc.com.