For some of us, automobile costs are one of the top three costs in our business. But no matter where automobile costs rank in your business, the cost remains one of the most common expenses among us business owners. But for such a common expense, why are the tax rules so uncommon and hard to navigate? Why are automobile costs one of the most overlooked deductions? And why does it feel like maintaining a mileage log is like rebuilding a transmission? What’s the best way to deduct these costs? Should I use standard mileage or deduct actual costs? Let’s take a road trip through the automobile rules and find some quick easy answers.
The starting line for our road trip begins with determining the purpose of our drive: will it be business, personal or both? Business use is the driver that is going to take us everywhere we want to go. Personal use is a lemon and doesn’t help for taxes. Business use is simply the amount of miles driven on a business trip. It could be a trip to the bank or a trip to a conference. Business use isn’t affected by minor personal errands along the way either as long as the personal driving doesn’t significantly alter a customary route. For instance, if you’re driving out of town to a conference and want to pick up a coffee on the way out of town then your personal coffee run just got included in a tax deduction! So do you have to drive your automobile exclusively for business to get a deduction? Nope. Just figure out how many business miles you drive as a percentage of your total miles and this becomes your business-use percentage. This is where mileage logs are critical. But what a station wagon of a term “mileage log” is. Yuck. Sounds painful. Thanks to technology, there’s amazing apps like MileIQ that make mileage logs something halfway fun. Ok, maybe I took that turn a little too far. A proper mileage log is your free parking pass in an IRS audit. If you don’t have a mileage log then you’re setting yourself up for some expensive tolls. The IRS can throw out any automobile deductions that are not properly substantiated by a mileage log. Conversely, if you present the auditor with a mileage log you can put the audit on cruise control and rest easy.
Now that we have a business-use percentage driving our deduction we need to figure out what we’re driving. There are several categories to be aware of and each has different rules (of course). Before we go there though, there’s some key terms we need to know:
Gross Vehicle Weight (GVW) – the max weight an automobile can carry (includes people and all their cargo
Unloaded Gross Vehicle Weight (UGVW) – the automobile’s weight without any people or cargo in it
Passenger Automobiles – has four wheels and has an unloaded gross vehicle weight less than 6,000 lbs (most cars and small SUV’s)
Truck or Van – same as Passenger Automobile but has a Gross Vehicle Weight of 6,000 lbs or less (most small pickups and mini-vans)
Sports Utility Vehicle – bigger than a Passenger Automobile but smaller than a Truck or Van
Cargo Carriers – big trucks and vans designed to haul cargo (dump trucks, delivery trucks, moving vans, etc.) included pickups with 6 foot beds
|Passenger Auto||Truck or Van||SUV||Cargo Hauler|
|Vehicle Weight||<6,000 lbs UGVW||< 6,000 lbs GVw||< 14,000 lbs GVW||> 14,000 GVW|
|Max 1st Year Depreciation||$18,000||$18,000||$25,000||$1,000,000|
Ok, so now we have a driver and we know what we’re driving. But how do we drive? There are two “hows”: Standard Mileage and Actual Cost. Here’s a summary of the two systems:
Standard Mileage (SM) – business miles driven x rate + license plate tax + loan interest
**The SM rate for 2018 is $0.545/mile and includes a depreciation component of $0.25/mile.
Actual Cost (AC) – business use percent x actual costs (fuel, insurance, oil changes, tires, repairs, car washes, loan interest, license plate tax, depreciation, etc.)
So which do you use? Well…it depends. How many miles did you drive? How much did you pay for the automobile? Is this the first year of business use? Here are some examples:
Example 1: AC Slater purchases a Tesla for $30,000 in December and drove it 500 miles for business purposes. If AC Slater chooses the Actual Cost method then he could take a depreciation deduction of $18,000. If he chooses the Standard Mileage method then his deduction would only be $273 (500 miles x $0.545).
Example 2: Stan Derd is a traveling salesman and decides to purchase a 1990 Toyota Camry for $500. He drives it 80,000 miles in 2018. If Stan Derd chooses the Standard Mileage method then his deduction will be $43,600 (80,000 miles x $0.545). If he chooses the Actual Cost method then he could only take a depreciation deduction of $500.
Can you change your mind? Maybe. You can always switch from Standard Mileage to Actual Cost. It is possible to switch from Actual Cost to Standard mileage but only in very limited circumstances.
Before we reach our destination let’s summarize our road trip:
- Don’t overlook a valuable automobile deduction
- It’s easier than ever to comply with IRS record keeping requirements
- Determining business-use is critical and beginning of all good things
- Size matters! Make sure you know the weight limits of your automobile
- Timing and cost should be analyzed to determine the best method for deduction
Looking in the rearview mirror you can see that there is much to consider when it comes to automobile costs and these are just the highlights! If you want to learn more or need help becoming more tax-efficient then give us a call and we’ll help turn your MPG into dollars-in-your pocket!