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  • Vehicle Expenses - Tax Planning Thoughts

    There’s always lots of confusion over the best way to get deductions for business related car and truck expenses. 

    Should you buy a vehicle?      Lease a vehicle?    

    Or Should you reimburse based on standard mileage rates? 

    What’s The best way?

    Unfortunately, every sitution is different so there’s no clear cut answer.  Let's start with asking yourself a few questions first:

    • How much will you use the car exclusively for business purposes?
    • How many business miles do you typically drive in a year?
    • Are you an employee or owner of the business?
    • How long do you typically keep your vehicle?
    • How expensive is the vehicle?
    • Can you keep a mileage log?

    Mileage Logs should be maintained. ~ The date of travel, the business purpose, the number of miles driven for business and the total miles driven for the year, are going to be needed to prove your mileage deduction; whether you purchase, lease or choose to do mileage reimbursement.

    • Do you have a smart phone?   Consider downloading a mileage log app to help you keep up and document your mileage. 
    • Lack of adequate mileage records will allow the IRS to reduce or eliminate any mileage or automotive expense deductions

    Standard Mileage Rate Reimbursement – For 2015 the IRS Mileage rate for business related mileage is 57.5 Cents per mile.  (There are different rates for Medical, Charitable, and Moving expenses.)   The standard mileage rate covers all gas, repairs and maintenance costs, and the depreciation of your vehicle.

    Pro’s

    • It’s Simple.  The number of business miles driven multiplied by the IRS mileage rate.   You don’t need to keep up with repairs, gas receipts, etc.
    • Most beneficial for the following scenarios:
      • Driving more than 12,000 business miles per year
      • Those who purchase cheaper vehicles
      • People that keep their cars longer than 5 years

    Con’s

    • Not as beneficial for lower fuel efficiency vehicles like SUV’s
    • Can’t be used if you’ve claimed depreciation expense on a vehicle already in service
    • Can’t be used in conjunction with the Section 179 Depreciation or any Bonus/Special Depreciation
    • Can’t be used if five or more cars are used at the same time

    Actual Expense Method – Is used whether you Lease or Purchase a Vehicle.  You can deduct depreciation of the vehicle along with the cost of gas, repairs, interest or lease payments; but the amount of the deduction is limited to the percentage that you used the car for business.  For example, if you drove your car 10,000 miles but only 6,000 miles were for business, you can only deduct 60% of the expenses.

    Pro’s

    • Can give you a bigger tax deduction in the first year of ownership if Section 179 Depreciation or Bonus Depreciation methods are elected
    • Most beneficial under the following scenarios:
    • Best if you drive fewer miles
    • Best if you drive a lower fuel efficient vehicle
    • Best if you keep you vehicles at least Five Years

    Con’s

    • Depreciation expense is generally lower in years 2 – 5 after the bonus depreciation.  Typically $3,160 per year.
    • You’ll need to keep additional documentation and pro-rate auto expenses based on percentage the vehicle is used for business purposes.
    • Selling the vehicle can lead to depreciation recapture in the year of sale (if sold before the sixth year of ownership).
    • If business use of the vehicle is lower than 50%, no automotive expenses are allowed for the vehicle.
    • Lease down payments are deducted over the life of the lease, rather than the year paid.

    We’ve outlined the bigger points to keep in mind, however there are tons of variables involved.  Check out IRS Publication 463 for additional information.


    11/11/2015



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