The business use of vehicles seems to be an inexhaustible topic with a new twist or wrinkle every year.
A review of the basics, specifically for automobiles, SUVs and pickup trucks, can serve as a foundation for a proper understanding of how vehicle expenses relate to tax deductions. Ownership, risk management and business-use percentages are good areas to review, in addition to the usual “How much can I write off on my taxes?” items.
Ownership
Ownership is an area that is often taken for granted.
First, let’s look at purchased vehicles. Whose name appears on the title to the vehicle? Is it the corporation or LLC, or is it the name of the officer or owner of the business?
More often than not, vehicles intended for business use are purchased in an individual’s name. But then they find their way onto the books of a corporation or LLC, along with the loan if there is one.
This decision may have several reasons. Perhaps the transaction at the dealership is easier for an individual, or a manufacturer’s incentive isn’t offered to a business purchaser. Perhaps the purchase in the name of the business would make the insurance more expensive than if it were in the individual’s name.
Something as simple as this could expose the person or business to unforeseen risks. It’s a good idea to discuss with your insurance agent how you will take title to the vehicle and what insurance coverage is appropriate.
Consider a contractor who does business as a corporation – primarily for liability protection – but purchases a pickup truck in his individual name. He obtains insurance under an individual policy. The contractor may or may not tell his agent that there will be business use of the truck.
The truck is recorded on the books of the corporation as an asset and is depreciated. All ownership costs are borne by the corporation.
Perhaps an employee takes the truck to run an errand and is involved in an accident that inflicts serious injury to another party. The truck is owned and insured by an individual.
How does that sound to the injured party’s legal counsel? Is this clear-cut and worry-free for the truck owner? Does it seem as if the corporate liability protection is firmly in place with no threat to the truck owner’s personally owned assets?
Most rational folks conclude that the more expensive but correct way to own and insure business vehicles is in the business name. By the way, the same general theme applies to leased vehicles.
Business-Use Percentages
Many business owners purchase or lease a vehicle and automatically assume that 100 percent of the costs are business related. In reality, the business use is often well below 100 percent. Mixed-use – that is, business and personal – vehicles are more the norm.
Beyond the initial purchase invoice or lease agreement, other records must be kept to support business deductions. Do you maintain a mileage log for your business vehicles?
This is an often mentioned and more often ignored area. The requirement to maintain contemporaneous mileage records shouldn’t be ignored. The log should contain enough information to tell someone reviewing it what happened.
It isn’t enough to have beginning and ending odometer readings of the vehicle. You need dates and business-purpose notations regarding the mileage. Any personal use of the vehicle also should be reflected.
The service records for the vehicle should tie into and corroborate entries in your logbook. Are you rolling your eyes? The thought of reconstructing such records when called for under IRS audit should be enough to motivate you to start doing it currently.
Depreciation
To make a discussion of depreciation easier, assume 100 percent business use of the automobile (however unlikely that is!). If your percentage is less than that, reduce the amounts accordingly. Beware if your business use drops below 50 percent because you will be subject to further reductions.
Any passenger car that costs more than $15,800 is considered a luxury auto and is subject to depreciation restrictions. When was the last time you noticed prices like that when automobile shopping?
SUVs and pickup trucks with a gross vehicle weight rating (GVWR) of over 6,000 pounds are exempt from the luxury auto depreciation limits. For federal tax purposes, large expensing deductions under Code Section 179 are currently available for these types of vehicles. Be sure to check whether your state goes along with the federal expensing rules.
The luxury automobile depreciation limits are as follows:
- First tax year maximum – $11,160 [$3,160 regular + $8,000 bonus depreciation if eligible (new) and you do not elect out]
- Second tax year maximum – $5,100
- Third tax year maximum – $3,050
- Maximum for subsequent tax years – $1,875
Trucks and vans subject to these rules (GVWR 6,000 or less) are allowed only slightly higher amounts than these. Search online for Revenue Procedure 2013-21 for tables that spell this out.
Leased Vehicles
Assuming 100 percent business use, lease payments are deductible. However, lessees must add back a certain amount to income each year to partially offset the difference between the fully deducted lease payments and the luxury auto depreciation limits that would apply if they owned the vehicle.