The question of “should I buy a car for my business” is probably the most often asked question I receive from business owners. I mean, why not! The lure of being able to receive a business deduction for an expense you already incur sounds like a tax win! However, we need to dive deeper to determine if there is really an opportunity for a tax deduction. Asking a few key questions will assist us in making the best recommendation for you.
The first question we need to ask is:
Do you drive deductible business mileage?
To figure this out, let’s define what deductible business mileage is and what it is not:
- Commuting from home to work
- Commuting from home to a temporary work location and from a temporary work location to work
- If your home is the principal place of business, commuting from your home to another work location
If most of your car mileage is commuting mileage to and from work, then only the mileage not considered commuting mileage is deductible mileage. You can see that if you can qualify for the business use of the home deduction, the possibilities in deducting mileage increases as mileage directly from your place of residence now qualifies as a deduction.
What kind of car did you buy and how much did it cost?
This question is important because we need to know the cost to determine which method of receiving a deduction is best for you. There are two methods for you to consider:
IRS Standard Mileage Rate
This is the mileage rate the IRS gives you for the business use of your car and is adjusted for inflation each year. In 2018, the IRS allows you 54.5 cents per mile. This allowance is meant to cover the cost of all the expenses of owning your car including maintenance, depreciation, gas, insurance, registration fees. Your deduction is calculated by multiplying your business mileage by the IRS standard mileage rate. The only expense the standard mileage rate does not cover is personal property taxes on the car which is separately deducted.
Pros – Less recordkeeping, you only need to keep a mileage log of business versus personal mileage
You can switch to actual cost later if you use standard mileage first
Cons – Could result in a small tax deduction
Actual Cost method
The actual cost method allows you to deduct the actual cost of using your car for business. This method can result in a higher tax deduction. Actual costs of your car include depreciation, gas, insurance, maintenance, fees, car washing, tires, etc.
Pros – Can result in a higher tax deduction than standard cost
Cons – Must keep detailed receipts of each vehicle expense in order to claim the deduction
So which one should I choose?
A determination of which method is better should be made on a case by case basis. Here are factors to consider:
- Purchase price of the vehicle – The IRS standard mileage rate does not increase based upon the purchase price of your vehicle. Therefore, whether your vehicle is a $15,000 vehicle or a $50,000 vehicle, the reimbursement rate will still be 54.5 cents per mile. Under the actual cost method, you will be eligible for a depreciation deduction based upon the full purchase price. For more expensive vehicles, the actual cost method could be a better choice.
- How many miles do you drive? – If you drive less miles for business, your deduction under the standard mileage rate is going to be less. Under the actual cost method, you receive the deductions for insurance, depreciation, etc. regardless of the mileage driven.
- Your recordkeeping skills – If you are awful at recordkeeping, using the actual cost method may prove too much of a hassle. You may want to use the standard mileage rate to minimize the records you need for a mileage deduction.
Important factors to consider
If you choose the actual cost method, you still must calculate your business use of the vehicle versus overall use to calculate a business use percentage which will be used to calculate the business portion of your car expenses. For instance, if you drive 10,000 miles during the year and 6,000 of those miles were for business, then you will be able to use 60% of the vehicles actual expenses as a business deduction.
The new 2018 Tax Cut and Jobs Act increased the allowable amount of depreciation for the first five years of owning a passenger automobile. Previously, the total amount eligible for depreciation in the first five years was $15,800. That amount has increased to $50,000, which might make small business owners take a second look at using actual expenses versus the standard mileage rate.