Updated: Feb 13
Probably one of the most often asked questions I get, has to do with auto related expense deductions.
Let’s get the number one decision point out of the way. Are you an employee using your vehicle on behalf of your employer and not being fully reimbursed for your costs? BAD NEWS. After 2017, the “employee business expense” deduction as a part of Miscellaneous Itemized Deductions is repealed until at least 2027. You don’t get any tax deduction. BEST, have your employer reimburse you by the current IRS mileage rate, currently 58₵ per mile (way more than the gas), and that reimbursement is NON-taxable.
Business owners who use their personal vehicle for business purposes are still allowed to deduct related expenses.
First, you must use the SAME method for each vehicle that was used in prior years. Either Actual Expenses or IRS Mileage. You can NOT switch back and forth by vehicle. For most newer vehicles it almost always works out better to use the IRS Mileage rate. If you have an older vehicle that gets really bad gas mileage and breaks down a lot, then perhaps using actual expenses would be more advantageous. Or, you want to take extra depreciation expense in the first year.
In both cases, the business owner must keep a log of all mileage for each vehicle and note business and personal use. (The percentage of business use over total miles driven determines what percentage of the actual expenses are allowable, or if using the IRS Mileage rate, then only the business miles are used in calculating the business deduction.)
Keep in mind, if you have chosen actual expenses as your route for a particular vehicle, then you should keep a record of all actual expenses. Gas & Oil; Tires; Repairs & Tune-ups; Insurance; Registration Fees.
One last thing, when you have decided to use actual expenses, if you purchased the vehicle, you can take interest expenses related to any loan used to purchase. If you are leasing the vehicle, then your lease payments related to the business use portion are fully deductible as you pay them. If you purchased your vehicle, there are depreciation expense options available (if you are using actual expense rather than the IRS Mileage rates). You can take the default, which is to expense a portion of your purchase price each year over the estimated useful life (for vehicles, usually 5 years). You can use the default IRS depreciation rates which take a larger deduction in earlier years and smaller deduction as the car gets near the end of it’s useful life, or you could choose to take the deprecation equally over the useful life (called straight-line). In addition, you could expense some “bonus” portion early (in the year of purchase). For large vehicles (SUVs, full-sized pickups, or large vans), you could expense up to 100% of the original business related purchase price in the year of purchase. For passenger vehicles, for the business portion, you can take a maximum of $18,000 in year one, $16,000 in year two, $9,600 in year three, then $5,760 for each remaining year until you’ve used up the original purchase price.
Confused yet? Oh! Now I remember why most folks ask a lot of questions about this topic, it’s not as simple as it sounds. If you’re a business owner, you should be using a professional tax preparer, not preparing your returns yourself. The new tax law was attempting to make it easier for non-business owners to file their tax returns without any professional assistance, not you.
Did you hear? 1 Cor 14:33 says, “For God is not a God of confusion but of peace.” Too bad we can’t say the same about the tax laws that Congress passes.
Kelly Bullis is a Certified Public Accountant in Carson City. Contact him at 882-4459. On the web at BullisAndCo.com Also on Facebook.