How To Maximize Tax Savings When Using Your Car For Business

Last week, the IRS made an unusual announcement that from July 1, 2022, the standard mileage deduction would increase to 62.5 cents. Gas prices have risen rapidly since the beginning of the year. The IRS reported a similar rise in mid-year in 2008, when gas prices rose sharply.

As car and gas prices continue to rise, it would be wise to have a general understanding of the tax rules on car tax deductions. The use of a car by the IRS can be tax deductible in two ways: the actual expense method and the standard mileage method. Today’s column will compare these two methods and help you decide which method to choose.

The actual cost method allows you to deduct a percentage of your car’s operating expenses, such as gas, insurance, maintenance costs. If a car is rented, the rent payments are also proportionally deductible. So if a car spends $ 5,000 a year on operating expenses and 80% of the time it is used for business, then the cost is $ 4,000 deductible.

There are some drawbacks to using the actual spending method. If you use this method for the first year that your car is used for business, you cannot switch to the standard mileage method for the next year.

Also, the purchase price of a car is generally not deductible if it is paid in full or by repayment of the loan. Instead, the cost of a car is amortized over a certain number of years. But the exception to the payback rule is for some heavy vehicles, typically SUVs over 6,000 pounds. The cost can be 100% tax deductible as a rebate if the car is used for more than 50% for business.

FOMO release: This is the last year you can buy a heavy vehicle and claim a full 100% deduction. In 2023, the amount of the amortization of the allowance will be reduced to 80% of the purchase price with a greater disappearance in the coming years.

The standard mileage method allows you to subtract the standard mileage rate for every mile for business purposes. The rules are very liberal for business purposes, as long as it is reasonable. For example, driving 100 miles would be considered unreasonable to go to a bank to deposit a $ 50 check.

The only non-deductible business-related deduction is from home to office and back. However, you can circumvent this rule if you dedicate a portion of your home as a home office. This can be achieved by dedicating a part of the home to business purposes and carrying out the necessary business tasks, such as gathering clients, research and administrative tasks, to name a few.

Also, the standard mileage rule cannot be used if you have claimed the above-mentioned accelerated depreciation rules.

So based on the above, which method would provide the most tax savings? It depends on the intention of getting and using the car.

Lease. If you are renting a car, it is generally best to use the actual expense method. This is because most leases limit the number of miles you can drive without penalty. So using a standard mileage rate may not be profitable.

To give you a simple example, suppose you are renting a car and plan to use it for business 80% of the time. You have to pay $ 800 a month for a lease with a monthly limit of $ 12,000. Plus, your insurance, gas, and maintenance costs an average of $ 600 a month. So your total monthly operating expenses are $ 1,400 per month. In addition, the standard mileage rate is 60 cents per kilometer.

Using the actual expense method, $ 1,120 is deductible from operating expenses, which is 80% of all monthly operating expenses. On the other hand, if you use the standard mileage method, driving only 80% of your annual business limit (9,600 miles), your mileage deduction will be limited to $ 5,760 per year or $ 480 per month. Using the actual spending method, you get a higher monthly deduction of $ 640.

Buy. If you buy your car, the method you use will depend on several factors. The first is whether or not you are buying a heavy vehicle eligible for a rebate. If you take the amortization of the allowance, you can achieve high tax savings if you are in a high tax bracket. But you can’t use the standard mileage deduction while you’re in the car.

If you own a regular passenger car, you will need to consider the purchase price, depreciation, operating and maintenance costs, and the number of miles you want to drive. In general, if you buy an expensive car with high maintenance costs and often don’t plan to drive, you should use the actual expense method because the standard mileage rule will result in a lower tax deduction. However, it is recommended to use the standard deduction for the first year, then switch to the actual expense method.

But if you buy a cheap car with high gas mileage and low maintenance, and you plan to drive a lot, it was traditionally recommended to use the standard mileage method. That was because the standard mileage deduction would be higher than the actual expense method. However, in 2018, the annual amortization limits were significantly increased, which may make the use of the actual expenditure method more attractive.

Buying or renting a car is a big decision that requires a lot of thought. And trying to maximize tax benefits only makes it more complex. But with careful planning and a level of luck, you can save thousands of dollars a year in taxes and over time, tax savings can pay for the car itself.

Steven Chung is a tax lawyer in Los Angeles, California. It helps them do basic tax planning and resolve tax disputes. He is also sympathetic to people with large student loans. You can contact us by email [email protected]. Or you can connect with him on Twitter (@stevenchung) and connect with it LinkedIn.


Leave a Comment