Which 3 of these things should you check for auto expense deduction at year end?

The Auto Deduction is the best it’s been in over 30 years, with business owners able to write-off a vehicle faster and with even bigger deductions! These changes with this amazing tax benefit and strategy became effective January 1st, 2018 under the Tax Cuts and Jobs Act (TCJA), and included Trucks, SUVs, RVs, and even Motorcycles.

The biggest benefit of the current auto deduction is Bonus Depreciation. It’s still alive and well for 2022. However, it starts to phase out in 2023 and will be completely gone after 2026. Unless the Biden Administration and Congress decide to extend it (cross your fingers).

The Auto Write-Off isn’t “Travel”

When it comes to the auto write-off, first and foremost remember the auto deduction isn’t part of the travel expense. This is all about expenses for any of YOUR vehicles with some level of business use.

The travel expense includes things such as airfare, hotel, taxi, tolls, parking, uber, Airbnb, and rental cars. See my other article on travel expenses: “Plan Your Travel for a Big Tax Write-Off.” 

Keep in mind that the Auto deduction can include: automobiles, SUVs, Trucks, Motorcycles, RVs, Vans, Delivery vehicles…really anything that doesn’t fly or isn’t on rails.

The Actual Versus Mileage Method

Although, as with most tax deductions, you don’t maximize the auto write-off by simply checking a box. The big question in conversations with our clients is:

“Which strategy is best for me with my car, truck, or SUV…even my RV? Should I use the mileage or actual method; and should I lease or buy new or used?”

Thus, it’s important to understand the TWO MAIN OPTIONS business owners must choose from to document and utilize when writing off the auto expenses. It all starts here!

The Mileage method is a fixed deduction amount (in cents) that you can take for every business mile you drive your vehicle for business. It includes everything you might pay for with your car. For example fuel, repairs, maintenance, auto payments, etc., …except interest on the auto loan (more below).

The Actual Method allows the business owner to take all of the expenses listed above plus depreciation. However, it requires the business owner to keep excellent records. This includes a mileage log…yet the write-offs can be significant (more below).

Seven ‘Rules of Thumb’ to Consider When Writing Off Auto Expenses

The question of Mileage or Actual can get complicated quickly with lots of variables. Helping thousands of clients over the years deduct their auto expenses, our law and accounting firm has discovered some ‘common themes’, or some general rules/guidelines. That can at least be a starting point for a strategic decision.

To make things a little easier for you at the outset of your analysis, I have listed 7 general “Rules of Thumb” below that will help guide you through the decision process.

These ‘Rules of Thumb’ oftentimes point a client in the right direction while they’re out shopping for a car, truck or SUV. Then a brief consultation before or after the purchase allows us to craft the best strategy to meet their particular circumstance and set of facts.

‘Rules of Thumb’

• Rule #1 – If you are going to put on A LOT of business miles, and the car is generally a lower purchase cost than the Mileage Method is going to win.
• Rule #2 – 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, then you will lean towards the Actual Method.
• Rule #3 – If you’re NOT going to have a lot of business miles, and it’s a more expensive car used exclusively or primarily for business, you should consider leasing and the Actual Method. You’ll have lower monthly payments making a better economic decision. 
• Rule #4 – If you are going to have low miles and it’s a lower-cost vehicle used primarily or exclusively for business, I would still lean towards the Actual Method because the miles won’t give you the benefit compared to at least some type of depreciation.
• Rule #5 – If you are going to use your car part-time for business because you have a day job, you will typically use the Mileage Method. The reason being is that you have to show at least 50% business use in order to utilize the actual method. 
• Rule #6 – If you are going to buy a 6,000lb or more SUV or truck, you will generally lean towards the Actual Method because you are going to have a lower MPG pushing up your actual costs and bonus depreciation is 100 percent. In other words, you can possibly write off the entire vehicle in the first year.
• Rule #7 – If you have a high MPG (think hybrid or electric), but still have average use and miles, you will lean towards the Mileage Method because your operating costs are going to be much lower generally.

** Again, keep in mind 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.

The Mileage Method

On ANY of your vehicles, you can always use mileage as an EXCELLENT method to expense the business use of your vehicle. In 2022 your mileage deductions are as follows:

• Business – 58.5 cents a mile (2021 was 56 cents)
• Charity – 14 cents a mile (no change)
• Medical and Moving – 18 cents a mile (2021 was 16 cents)
• Personal or Commuting – NO DEDUCTION

In the past, 90% of our clients used the mileage method because it’s SIMPLE, EASY, and a LARGE deduction. Now it’s a whole new ball game!! Keep in mind almost every situation with business-owning taxpayers will vary and several MAJOR factors will impact the analysis.

The Actual Method

The second method in deducting automobile expenses is by using the actual expenses for the vehicle. When you use this method you CANNOT use mileage. Essentially, you track your fuel, repairs, maintenance, insurance, tires and then also “depreciate” the vehicle or a portion of the lease payment if leasing.

Another problem in years past is that because of limits imposed back in the 1980s, a business owner’s depreciation deduction was ridiculously low. For example, if you bought a $40,000 car and drove it 100% for business, your maximum auto deductions for the first five years would only be $15,060. To fully depreciate the car would take 19 years!! Are you kidding me?!!

Now with 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 Deprecation–

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…something I analyze more fully below. The 2021 Annual Depreciation Limits for autos under 6,000 lbs. are:

• Year 1 – $10,200 ($18,200 with Bonus depreciation- see below)
• Year 2 – $16,400 
• Year 3 – $9,800
• Year 4, and each subsequent year – $5,860
• (The IRS will release 2022 #s mid-year) 

When you buy that $40,000 car in 2018 through the end of 2022 (compare the example above), you can write-off 89% of the car in the first 3 years, PLUS: fuel, repairs, maintenance, etc… That’s well over 80,000 in miles if you were to use the mileage method!! Depending on Fuel, Repairs, and Maintenance that is an auto deduction of more than $35,000! 

BONUS Depreciation –

Also, under the new law, we get a perk if we go out and buy a new OR USED car. That’s right. 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!

So what 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
• and of course, HOW MUCH will this car cost

Leased Vehicles

Leasing is a phenomenal auto deduction strategy, but not without its drawbacks. The tax benefits are phenomenal. You can again take all the actual expenses, including the lease payment (based on your business use percentage). Also save on the cost of a luxury car when monthly payments may be cheaper when leasing.

• The Drawback isn’t a surprise for those that have leased a vehicle before – The mileage limitations by the manufacturer/dealer can really kill 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—buckle up!!
• The Benefit of Leasing is for those that want a second car for those nicer appointments – You aren’t going to be blowing a bunch of miles in this situation and you can have a more luxurious vehicle to take clients and customers out to lunch in and make sales calls. It’s critical you have a separate vehicle for personal or business use where you can burn through the miles, and NOT on the leased vehicle. 

SPECIAL NOTE—Tracking Mileage

No matter what method you choose, keep in mind it’s extremely important you ALWAYS track your mileage (or estimate it as best as you honestly and ethically can). This is because your total business miles will determine your ‘business use percentage’ for the actual method AND of course your mileage deduction if you are using the mileage method.

It can be a written record, but the best strategy is to use an App on your phone that can track your mileage with a GPS tracking system. I recommend using QuickBooks Mobile (They have an awesome mileage tracking feature and if you click that link you get 55% OFF your first 3 Months!) 

Create an Auto Deduction Strategy

In order to ultimately make the best decision on which method is best for you and in YOUR situation, I suggest two things:

1. Create a Spreadsheet to analyze the situation. It doesn’t have to be complex either. Establish columns to compare the mileage, purchase, and leasing options. Then the rows can be different types of vehicles and different scenarios. You can do most of the research and calculations by simply pulling information off the web. This will save you time and money rather to do the basic leg work. It will also save the ‘heavy lifting” for your tax advisor. This brings me to #2…
2. Next, go over the Spreadsheet with your accountant/tax preparer and fine-tune the analysis!! Oftentimes your tax advisor is going to be able to review the best strategy by looking at the overall ‘picture’ of your tax return and if the strategy makes sense. Regrettably, the best write-off can be ‘suspended’ into the future based on the overall income of your business or businesses. 

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, but significant auto deduction that is often missed simply because it takes a little added effort.

Interested in Learning More:

* To sign up for Mark’s weekly Free Newsletter and receive his Free E-Book “The Ultimate Tax Strategy Guide – 30 Steps to Saving the Most Money on Your Taxes” visit www.markjkohler.com.

Mark J. Kohler is a CPA, Attorney, co-host of the PodCasts “The Main Street Business Podcast” and “The Directed IRA Podcast”, and the author of “The Business Owner’s Guide to Financial Freedom- What Wall Street Isn’t Telling You” and, “The Tax and Legal Playbook- Game Changing Solutions For Your Small Business Questions”, as well as several other well-known books. He is also the CFO of Directed IRA Trust Company, and a senior partner at the law firm Kyler Kohler Ostermiller & Sorensen, LLP, and the accounting firm K&E CPAs, LLP. 

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