One of the profit decisions business owners need to make is around vehicles. Should you buy a new vehicle or a used one? Can you buy a vehicle with all of your profit and get a tax deduction for it?
There’s a lot that goes into tax deductions when it comes to vehicles. One of the things that you need to ascertain to substantiate it is documentation. You must make sure you’re documenting things appropriately.
Documenting Your Mileage
Make sure you're documenting your business mileage compared to your personal mileage and be consistent. Many business owners get busy day in and day out and eventually come to realize that it’s been several months and they still don't have any documentation.
Ways to Track Your Mileage
- Mileage App
Get a mileage app. If you set that up and start tracking your trips, whether they're business or personal, it will do the job for you.
- Record Log or Google Spreadsheet
Keep a record log of the mileage that you put in your car or use a Google spreadsheet. Log the date, the number of miles, and the purpose of the trip.
- Calendar
Log the starting odometer at the beginning of the year and then the ending odometer at the end of the year. If you keep up with your schedule on a calendar, you’ll have an idea of the regular trips. Then you can recreate your mileage based on that calendar which acts as a document to supports your mileage.
The Rate of Reimbursement
Every year, the IRS decides what their reimbursement rate for mileage looks like.
If you’re a sole proprietor, you get the deduction for it personally.
If you're in an entity of any form, an LLC, a partnership, an S corp, or a C Corp, an accountable plan will help you get the reimbursement paid out to you. It typically comes as a deduction on your income statement or your profit loss statement and it keeps the expenses for the company.
Purchasing the Vehicle Inside the Business or Personally
This depends on how much you drive and how long you're going to own the vehicle. If you purchase a vehicle inside the business, you'll get a 100% deduction over one to three years. However, once you depreciate that vehicle, there are no other big deductions. The best option is to flip your vehicle every three years.
Now, if you plan on keeping your vehicle for even five years, the mileage component might get you more money over a five-year period. Understand that you're going to pay more in business insurance if that vehicle is purchased inside the company.
If you have a spouse who’s also using the vehicle or you have multiple vehicles, be sure to talk to your accountant or your tax advisor so you don’t miss out on opportunities. This will also ensure that they can do their best to protect you as much as they are helping you get tax advantages.
If you want to learn more about tax deductions for mileage and vehicles, check out Episode 068: Understanding Tax Deductions for Mileage & Vehicles.
