When making the decision on whether to have a business-owned auto vs. a personal auto there are a couple considerations you should keep in mind.
Should I Take a Mileage Deduction or Itemize My Expenses?
Everyone who has a business uses a vehicle at some time, even if it is just to run to the office supply store. For this business use of your automobile, you can either take a mileage deduction for any business use, or itemize your individual expenses and calculate the percentage of those expenses used for business and what percentage was used for personal reasons.
If you do the former, you need to track your mileage. If you choose the latter, you will need to save your receipts for gas and oil, maintenance and repairs, insurance, interest payments on your auto loan, etc.
Typically, someone would choose to take a mileage deduction or a percentage of expenses for a personal vehicle that is sometimes used for business and would track actual expenses for a business-owned vehicle that is being depreciated as a business asset.
If a vehicle is owned by the business, you will have to track the mileage of any personal use, such as picking the kids up from school or going out to eat after work, anything that is not business related.
For a vehicle that you have owned for a number of years, you will probably track your business mileage and take that as a deduction. If this is the first year you have used a vehicle you just purchased, it would be smart to track both mileage and expenses. You can give these figures to your tax accountant at the end of the year and let them decide which deduction is the most advantageous.
If you want to take a mileage deduction, you will need some way to track your mileage. You can simply write your mileage in a log you keep in your car, however, what we recommend at The Bottom Line is that you use a mobile app such as Trip Log or MileBug. These apps will use your smart phone’s GPS to track your trips. You can designate the trips you take as business, personal, medical, or for charity. You can also print a variety of reports. This makes your accounting effortless.
Once you have determined whether you want to take a mileage deduction or track your actual expenses, you will need to do that for the lifetime of that vehicle. You can’t take a mileage deduction when gas prices are low and deduct expenses when those prices go back up. The IRS will not permit this type of switching. You have to decide which type deduction you will take the first year you use that vehicle for your business, and then do the same thing every year after that.
Should I Buy an Automobile Out of My Personal Budget or as a Business Expense?
If you have decided to have your business purchase a car or truck, ensure that you are accounting for any personal use of the vehicle. The IRS expects that a business vehicle will be used for personal errands and trips occasionally. When these occur just keep track of the mileage for personal use. At the end of the year, add up all the personal mileage, determine what percentage personal mileage is of the vehicle’s total mileage for that year, and subtract this percentage from the vehicle’s total compiled expenses. Reporting that a vehicle was used 100% for business will cause a tax return to be viewed with a suspicious eye and could even trigger an audit. (See our “No-Fail Financial Cheat Sheet” for this and other tips.)
Another important strategy to consider when you are deciding whether to buy a new personal auto or to purchase it through your business is the cost of insurance and what kind of coverage you will need. Auto insurance for a business auto can be almost twice as expensive as personal auto insurance. This is because of the increased liability issues involved for businesses.
Although you can pay less for insurance on a personal vehicle, you want to check your policy to ensure you are adequately covered if you are in an accident while using your personal vehicle for your business. It may be financially wise to have a separate business liability policy or a business rider on your personal auto policy in case your business is sued.
“Can I create a mileage log by looking at my calendar and determining where I went throughout the year and the distance I drove to get there?”
I knew somebody was going to ask that question. The answer is “Yes!” You can do that. But you are probably going to forget a lot of trips you took that were not important enough to schedule, such as, running to the copy store to pick up a new batch of business cards or the afternoon you drove around the neighborhood to see if there was better office space available in your area. It is probably better (and a lot easier) to simply log your mileage as you drive it. The alternative is trying to remember where you drove a year earlier and mapping the trip on mapquest.com just to find out how far it was.
Mileage Deductions That Aren’t Business Related
Other mileage deductions you can take that you may not think of are: driving to a charity for volunteer work or driving to medical appointments and other medical-related driving. These deductions are given at lower per mile rate and aren’t as generous as business mileage, but they too can add up over the course of a year.
One Example That Needed a Professional
Earlier this year, a couple who has an online business and are clients of the The Bottom Line, asked for some time to discuss the purchase of a new automobile. They had done well that year and had extra profits that they were looking to reinvest in the business. Instead of, paying taxes on those profits as income, they wanted to purchase a car for their business use. They had questions about many of the issues we have discussed. Should they purchase the car as a personal vehicle or as a company car? Should they itemize expenses or track mileage?
Most often, I advise people to purchase a personal vehicle and take the mileage deduction, but this couple’s situation was unique. They worked out of their home and did very little driving for either their business or their personal use. There was a greater tax advantage to buying the car as a company vehicle and using the tax code to their advantage and depreciating it over a three-year period. If they did use it for anything personal, they simply tracked those miles and reduced their automobile expenses by that percentage.
The Bottom Line
Car expenses are one of the most beneficial tax deductions out there, yet many neglect to track these expenses and simply pay more taxes than they need. The laws can be rather daunting and if you are not familiar with them, it is best to consult your tax professional or accountant to ensure you are taking the greatest advantage of those permissible deductions.
Which of the options for deducting car expenses for your business do you use? Share your thoughts in the comments below!