As a property investor, do you know instinctively that it’s not just about how much you earn; it’s also about how much you can legitimately save on expenses?
In the intricate maze of property investment, there lies a golden opportunity that’s often misunderstood, and believe it or not even overlooked:
Writing off a vehicle for business purposes.
Real estate investors can potentially reduce their net income for tax purposes by thousands of dollars. In a large number of cases, even save thousands of dollars in taxes!
This doesn’t just help in reducing your tax bill; it directly contributes to increasing your wealth through the simple process of balance.
But before you rush to purchase a vehicle under your business’s name, let’s debunk a common myth.
Purchasing Under Business Name: Is It Necessary?
The short answer is: no.
Many investors, as well as a large number of taxpayers in general, operate under the misconception that to write off vehicle expenses, the vehicle must be registered under the business’s name.
In reality, what matters is the use of the vehicle, not its title.
Regardless of whether your vehicle is titled under your personal name or the business, the IRS will allow you to deduct expenses related to the business use of that vehicle.
The key factor here is demonstrating evidence of its business percentage of use.
This can be achieved by maintaining a detailed log of business-related trips, mileage, dates, and purposes. The log serves as a testament to the percentage of the vehicle’s use that is dedicated to business activities.
The kind of log you keep depends on the method you use for the expensing of your vehicle.
There are two of them, and it’s important to know the difference between them because you have to choose one or the other.
The IRS is annoyingly strict about that one!
The two methods to expense a vehicle for business purposes are: the Standard Mileage method and the Actual Expense method.
Standard Mileage Method
The Standard Mileage method is straightforward. The IRS annually sets a rate per mile, which you multiply by the number of miles driven for business purposes. This method, and the rate the IRS chooses each year, takes into consideration wear and tear on the vehicle, as well as fuel, insurance, maintenance, and depreciation.
If your vehicle is used for business purposes less than 50% of the time, the IRS mandates the use of the standard mileage method.
The rationale behind this is to provide a simplified method for businesses that don’t predominantly rely on their vehicles.
It prevents companies from taking excessive deductions by allocating minimal personal use and claiming substantial actual expenses.
The rate has been going up considerably since the emergence of the COVID pandemic, and for 2023 it’s sitting at an all-time high of 65.5 cents per mile.
Bonus: Parking and Tolls
Parking and tolls expenses are what I think of as a bridge expense of your automobile reporting, because these two items are allowable under both the standard mileage and the actual expense methods.
Make sure you’re keeping all those receipts, or running these expenses through your cloud-based software!
Actual Expense Method
With the Actual Expense method, you tally up all the costs associated with the vehicle, including:
Fuel
Maintenance and repairs
Insurance
License and registration fees
Depreciation
Then, you multiply the total amount by the percentage of miles driven for business purposes.
For businesses that rely heavily on their vehicles, the Actual Expense method can be substantially beneficial.
There are two huge reasons why this is the case. They can be identified as tangible and intangible.
Allow me to explain…
Tangible Expenses
Fuel, maintenance, and repairs can add up quickly, especially for vehicles in heavy use.
But as they say on late night commercials…”But wait, there’s more!”
When you go actual expense, it all counts.
License and registration fees
Insurance
State property taxes (located on the registration, usually)
Fuel
Maintenance and repairs
Tires
Intangible Expenses
Depreciation represents the loss in value of the vehicle over time. It actually helps to think of it as the gradual expensing of the cost of the vehicle from the date it’s placed into service until either it’s salvage or sale date.
This intangible expense can be substantial, especially for newer or more expensive cars.
The reason we consider this to be an intangible expense is because you’re not actually reducing cash flow of the business to take this important write-off.
The standard mileage method is purported to have a depreciation calculation built into it, so it’s critical to take advantage of depreciation, and to weigh the options of typical double-declining balance depreciation vs. taking advantage of bonus depreciation in the year of purchase.
Bonus Depreciation
One of the most significant advantages of the Actual Expense method is the opportunity to claim bonus depreciation.
Under certain tax laws which have been carried over a couple of extra years due to the pandemic, businesses can immediately deduct a large percentage of the vehicle’s cost in the first year.
Keep in mind that the percentage of allowable first-year bonus depreciation is declining over the next several years, on the following schedule:
80% in 2023
60% in 2024
40% in 2025
20% in 2026
This “front-loading” of depreciation can save taxpayers thousands of dollars in the early years of vehicle ownership, and as you can see if you’re contemplating waiting vs. acting now on a purchase, this schedule can be useful in helping you to decide.
It’s essential to be aware of all of the limitations. There are caps on how much can be claimed, especially for luxury vehicles.
Plus, once you choose the Actual Expense method for a particular vehicle, you’re generally locked into that method for the entire time you use that vehicle in your business.
This is actually palatable in the long run, however, because in most cases you’ll be depreciating over the course of 5 actual, and as many as 6 calendar years.
To Tie a Bow on the Car in the Driveway
Selecting the right method to write off your business vehicle is crucial for maximizing tax benefits.
While the Standard Mileage method offers simplicity, the Actual Expense method can lead to significant savings, especially when taking advantage of bonus depreciation.
Maximizing specific expenses is just one of the many strategies we use to maximize the cash flow and business wealth of our clients.
Would you like to learn more about how that works?
Come book a free no-obligation hour with me, today.
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Reach out now through the social media you may be reading this on, or just click here and book a Work With Me conversation now.
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