A frequent mistake made by many business owners is with their auto expenses and tax deductions. The most common deduction method is the Mileage Method, and the deduction for 2020 is 57.5 cents per business-use mile. This deduction INCLUDES the costs for fuel and oil, maintenance, tires, car washes, and insurance. It is still a good idea to keep an eye on these expenses, but your tax preparer will not need them to calculate your tax deduction. You should keep accurate records as to how you use your vehicle in your business. Often times, we see where a taxpayer will “double dip” the mileage and the costs for fuel, maintenance, and insurance; this is not permitted.
We take a lot of calls from business owners in December who ask about buying a new vehicle and writing off the entire purchase price on their taxes for the current year. This is a method that is complex and must be fully understood before taking the plunge. The manufacturer’s stated gross vehicle weight must exceed 6,000 pounds. Do not take the salesperson’s word for it as the IRS can use the Internet too. If you write off the entire cost of the vehicle (new or used, but it must be new to you) in the first year of ownership, you will be required to use the Actual Method for the entire period you own the vehicle. You will not be permitted to also use mileage, nor can you switch between the two accounting methods while you have this vehicle in service. Because you wrote the entire cost of the vehicle in the first year of ownership, when you go to sell it, or trade it in, the amount you sell/trade it will be recaptured as income because your cost basis is zero.
An example of a write-off in the first year could be a vehicle purchased for $75,000. If you keep your vehicle for a long time, say ten years and then sell it for $7,500, the recapture amount reported as income would be $7,500 which would likely not be a big deal for most people. However, what if you sold it or traded it in after three years and the recapture amount was $35,000? Depending your income level, this could be a really big deal.
Please take a moment to review your past three year’s tax returns. You may determine that the mileage deduction may work to your advantage, especially if you prefer to drive newer vehicles.
This type of financial analysis is something Killingsworth Spencer regularly does for our clients. As a business owner, your vehicle is an extension of your office and your image. Vehicles are expensive to purchase and to maintain, and as such it is a good idea to run a cost analysis to determine the most appropriate accounting method that best suits your financial needs. If you would like some expert help to run the financial model, please send us an email at firstname.lastname@example.org or call us at 770-552-8286.