Auto Deduction Strategies for Business Owners
The biggest benefit of the current auto deduction is the strategy of Bonus Depreciation. This strategy includes Trucks, SUVs, RVs, and even Motorcycles. It was 100% in 2022 but now has started the phase down to 80% for 2023 and 60% for 2024.
The first thing to understand is – The Auto Deduction Is Not “Travel Expenses”
The auto deduction isn’t part of your travel expenses. Travel expense is separate from your auto expense. Auto deductions are expenses incurred for any of YOUR vehicles used for business purposes.
Travel expenses are your airfare, hotel, taxi, tolls, parking, Uber, Airbnb, and rental cars while you are traveling for a business purpose. See How to write off your travel expenses
Actual Expenses Versus Standard Mileage Rate
Everyone always asks, “Which deduction should I use – The standard mileage rate or actual expense method”?
The Standard Mileage Rate is a fixed amount per mile that you can deduct for every mile you drive your vehicle for business.
The rate includes everything you would pay to operate your vehicle. For example, fuel, repairs, maintenance, insurance, etc. It does not include interest on the auto loan. That is a separate deduction. If you drove your vehicle 10,000 miles for business, you would calculate the deduction by taking 10,000 x the standard rate for that year and that’s your deduction amount.
You can take the standard mileage rate On ANY of your vehicles you use for business.
In 2023 the standard mileage rate is:
- Business Miles – 65.5 cents a mile (up 3 cents from the mid-year increase in 2022) (2024 rate is 67 cents a mile)
- Charity – 14 cents a mile (no change)
- Medical and Moving – 22 cents a mile (up 4 cents from 2022)
- Moving for qualified active-duty members of the Armed Forces
- Personal or Commuting – NO DEDUCTION
The Actual Expense Method allows you to deduct actual expenses plus depreciation. You must keep your receipts for fuel, repairs, maintenance, insurance, tires, etc. And you still have to keep a mileage log to prove your business percentage use.
When you use the actual expense method, you CANNOT use the standard mileage rate.
Here’s a guide to help you decide which method to use
Use The Standard Mileage Rate If:
- You are going to put A LOT of business miles on your vehicle and it’s a lower purchase cost, then the Mileage Method is typically going to best.
- You will have low miles, it’s a lower-cost vehicle, and you’re not going to use it 50% or more for your business. The Mileage Method is your only option because you don’t qualify for the Actual Method.
- You have an extra car in the household, driven by you or other family members for business occasionally, you will typically use the Mileage Method because the business use % will likely be under 50% so that’s your only option.
- You have a high MPG (hybrid or electric), but still have average use and miles, you will lean towards the Mileage Method. Here’s why:
- 1) your operating costs are going to be much lower than an average gas vehicle
- 2) you don’t have to worry about your business use % since you’re going with mileage
- 3) hopefully you can qualify for the Clean Vehicle Tax Credit on top of your mileage deduction!
Use the Actual Expense Method If:
- You’re NOT going to have a lot of business miles and it’s an average-cost vehicle used exclusively or primarily for business (50% business use or more). You will lean towards the Actual Method because the miles won’t give you the benefit compared to the depreciation plus fuel, repairs, insurance, and maintenance.
- You’re NOT going to have a lot of business miles and it’s a more expensive car used exclusively or primarily for business (50% business use or more). You should consider leasing AND taking the Actual Method. You’ll have lower monthly payments and a much better deduction than mileage. Leasing a vehicle should only be done when you have the money to purchase the vehicle outright but choose to lease it for tax deductions and the deductions make sense.
- You are going to buy a 6,000lb or more SUV or truck. In this case you will generally lean towards the Actual Method. Bonus depreciation is going to be bigger than the standard mileage method because you can immediately deduct up to 60% of the business use value of the vehicle (business use % x purchase price). Also, you are going to have a lower MPG, which means your actual costs for fuel expenses will be higher.
These are just general observations and considerations. You need to consider all the facts in your situation and meet with your tax advisor before choosing a method/strategy.
Since the Tax Cuts and Jobs Act we have Two INCREDIBLE changes that benefit the small business owner:
- Higher annual depreciation limits, AND
- Bonus depreciation
HIGHER Depreciation –
Under the NEW LAW, the limits are dramatically increased, whether it’s new or used. In fact, you can convert a personal car to “business” and take the same depreciation amounts (you don’t have to buy a new or used car to start depreciation and actual expenses). This is also assuming you don’t use the mileage method. The 2023 Annual Depreciation Limits for autos under 6,000 lbs. are:
- Year 1 – $12,200 ($20,200 with Bonus depreciation- see below)
- Year 2 – $19,500
- Year 3 – $11,700
- Year 4, and each subsequent year – $6,960
BONUS Depreciation –
Also, under the new law, we get a perk if we go out and buy a new OR USED car. It doesn’t have to be ‘brand’ new either... just new to you. This ‘Bonus’ is to stimulate the economy. The bonus depreciation is $8,000 and comes off the top! Here’s the math:
- $40,000 vehicle
- -$8,000 bonus depreciation
- $32,000 basis for standard deprecation, which will NOW BE FULLY depreciated in the first 3 years!
Which auto deduction method is best for You – Actual or Mileage? This is where it gets tricky.
There are lots of issues to consider:
- The miles per gallon (MPG) on the vehicle
- Bonus depreciation if a new purchase
- Total repairs or expected repairs and maintenance
- How many miles you expect to put on the vehicle
- Is the vehicle used more than 50% for business
- and of course, HOW MUCH will this car cost
Leasing a vehicle can be a good auto deduction strategy, but not without its drawbacks. The tax benefits are great. You can take all the actual expenses, including the lease payment (based on your business use percentage). Also, you’ll save on the cost of a luxury car when monthly payments may be cheaper when leasing.
The Big Drawback to leasing – The mileage limitations by the manufacturer/dealer can really cost you financially at the end of the Lease. For example, if you are allowed 15,000 miles annually under the Lease, when you turn in the vehicle at the end of the leasing period, you have to pay for every mile you went over—Ouch!!
The Benefit of Leasing – The tax deductions are huge because you get to deduct all the expenses including the lease payment. (limited to % of business use) You can have a more luxurious vehicle to take clients and customers out to lunch or make sales calls. You aren’t going to be putting a bunch of miles on the vehicle in this situation. It’s critical you have a separate vehicle for personal or business use when you need to drive a lot of miles.
SPECIAL NOTE—Tracking Mileage – I cannot stress this enough!
No matter what method you choose, ALWAYS track your mileage!! This is because your total business miles will determine your ‘business use percentage’ for the actual expense method AND of course your mileage deduction if you are using the standard mileage rate method.
Tacking your miles can be as simple as writing it in a notebook or planner, or you can get an App on your phone that can track your mileage with a GPS tracking system.
In addition, I always advise my clients to get their oil changed every December. This will give you an ending odometer reading that proves to the IRS how many miles were driven that year.
Simply thinking through your options AND realizing that if you are going to spend THOUSANDS OF DOLLARS on a vehicle, it’s extremely worthwhile to take some time to analyze the various options for getting the best tax deduction.
Tracking mileage is a simple process, and a significant auto deduction that is often missed just because it takes a little added effort.
For more tax tips go to www.ppsaccounting.com