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Maximizing Auto Deductions for Your Business

Hey folks, Samir Bhatia here from BW Group. At our CPA firm, we specialize in small businesses and high-net-worth individuals, particularly physicians and those in real estate. Today, we’re diving into a hot topic—auto deductions. This is a question we get a lot, so let’s break it down.

Auto Deductions Explained

When it comes to auto expenses, you only have two options: actual expenses or mileage. Whether you’re leasing or owning, you can either deduct the actual costs or use the mileage rate set by the IRS. Understanding which option to use can have significant implications for your deductions.

Mileage Deduction

For 2018, the mileage rate was 54.5 cents per mile. So, if you drive 12,000 miles annually, you could deduct $6,500. Over ten years, that’s $65,000 if you drive until the wheels fall off. Mileage deduction is perfect for long-term car owners.

What’s Included:

  • Toll fees
  • Parking costs

What’s Excluded:

  • Repairs
  • Car payments
  • Depreciation
  • Maintenance

Once you choose mileage, you can’t switch to actual expenses for the same vehicle and vice versa.

Actual Expenses Deduction

With new bonus depreciation rules, you can write off much more upfront. For example, if you buy a $40,000 car, you can deduct $18,000 in the first year. This is ideal if you’ve had a particularly good year and need a large deduction.

What’s Included:

  • Repairs
  • Fuel
  • Toll fees
  • Parking costs
  • Maintenance

Even if you only paid $4,000 towards your car in the year you bought it, you could still deduct up to $18,000 because you’re on the hook for the note.

Buying vs. Leasing

Buying

If you plan to keep your car for a long time and want consistent deductions, buying is your best bet. For cars around $40,000, mileage usually makes more sense over the long haul. But for higher-priced vehicles, actual expenses could be more beneficial over the lifespan of the car.

Leasing

If you’d rather switch cars every few years, leasing is the way to go. When leasing, you can write off your lease payments as rent expenses. However, keep in mind the IRS requires an “auto lease inclusion,” a small amount added back based on a formula they use.

Heavier Vehicles

For vehicles over 6,000 pounds, the rules get even better. Under the Section 179 depreciation and 100% bonus depreciation, you can write off the entire cost in the year you purchase it. For instance, buying a $90,000 truck allows you to deduct the full amount if you have the income to support it. This is a significant tax-saving strategy, especially if planned with your CPA.

Additional Mileage Rates

  • Charity: 14 cents per mile
  • Military Moves: 18 cents per mile
  • Medical Miles: 18 cents per mile

Remember, commuting from your home to your primary office isn’t deductible. However, we can discuss ways to make your home office your primary office to maximize deductions.

Takeaway

Understanding your options for auto deductions can significantly impact your tax savings, especially for high-net-worth individuals and small business owners like physicians and real estate professionals. Whether you choose mileage or actual expenses, it’s crucial to assess your driving habits, vehicle type, and financial situation to make the most informed decision. For long-term vehicle ownership, mileage deductions might be more beneficial, whereas actual expenses could offer substantial upfront deductions, particularly with the new bonus depreciation rules. 

Always consult with your CPA to tailor the best strategy for your unique circumstances, and leverage every possible deduction to optimize your tax position. At BW Group, we’re here to help you navigate these complexities and ensure you maximize your benefits.

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