Business Use of Car
R. F. Willeford, MBA, CPA/CFP
There is no topic hotter--or more controversial--than trying to write off business use of a vehicle. So here are some thoughts about how to navigate this tricky topic. Needless to say, the deductible portion of any vehicle expenses--including depreciation--is limited to just the percentage of business use. In addition, the IRS will only let you depreciate over 5 years the equivalent of about a $15,800 vehicle. And that assumes 100% business use! If you drive a $50,000 Mercedes, then it would take about 15 years to depreciate it! (Anything that costs over $15,800 is considered to be a Luxury Auto!)
The excitement about the 6,000 pound SUV is due to the fact that such a vehicle is NOT limited by the $15,800 Luxury Auto limits, because they are considered to be "trucks". *IF* you can justify business use greater than 50% every year for at least 5 years, then an SUV can be depreciated like dental equipment: you can take a big up front depreciation deduction for the Section 179 election ($25,000) and write off the rest over 5 years.
Of course, if you only use the vehicle for, say 75% business use, then you could only take 75% of the $25,000 depreciation, of the remaining depreciation and of the operating expenses.
Business Use
So, everything depends on determining how much business use you can justify. First of all, EVERYONE can justify SOME business use of their vehicle. You drive to the bank, study club, association meeting, CPA's office, lab, dental equipment showroom, CE, business meals, etc. After that it gets murky....
Many years ago, reporting business use of your vehicle on your tax return was fairly simple and innocuous: you simply deducted a percentage of your expenses. The percentage you deducted was not apparent on the face of the tax return, and that was only revealed if you were actually audited. Even then it was an informal give and take with the individual auditor and simple "reasonableness" was often the vague deciding factor.
Well, the IRS upped the ante and started requiring that you specifically state in your tax return the mileage figures that you used to calculate the business percentage. You also have to affirmatively state whether you have records to support your business use AND if such records are written. That is where the "log" comes in.
The mileage is reported as follows: Total Miles you put on the vehicle, Business Mileage, Commuting Mileage and Average Daily Round Trip Commute. (Any miles left over are personal miles in addition to daily commuting.) So there is not much wiggle room. Remember, commuting to and from work is NOT a business expense by definition. The IRS figures that everyone needs to get to work and back.
So the challenge is to minimize commuting and other personal mileage by transferring some of this mileage to business.
 | Commuting is considered to be the first and last trip of the day from home to work and back. If you drive to a branch office, hospital, teaching at school, etc., after going to your first stop, then the extra mileage is business. |
| A very aggressive way to minimize commuting is to make the daily bank deposit at a branch near your home. The argument is that the trip from the office to the branch is not "commuting". The IRS may not buy this logic, but it is certainly not fraudulent. |
| To satisfy the "written evidence" requirement, you might keep a log for just a few months, and then argue that that business percentage is representative for the whole year. |
Ownership
The basic deduction protocols do not change whether the car is owned or leased or if it is owned personally or through your corporation. However, there are a few specific issues.
| Depreciation is only allowed if you own the vehicle vs. lease it. (To avoid your getting around the Luxury Vehicle depreciation limits, there are similar limits for leased cars.) |
| If your corporation owns the vehicle, the corporation has to charge you for personal use of the car. If your personal use percentage is high and/or the cost of the vehicle is high, you may actually get charged with MORE personal income that the expense deduction you got! |
