[Editor's Note: This is a guest post from a physician and regular reader named Alex, who wanted to share some of his insights regarding the deduction of vehicle expenses. At any rate, it's a good post and we don't have any financial relationship.]
Have you ever wondered what is the most tax-efficient way to deduct your vehicle for business purposes? Is it more profitable to deduct mileage or actual expenses?
The Mileage Method Tax Deduction
When using the mileage deduction method, for every mile you drive in 2014 the IRS allows you to deduct $0.56. Therefore, if you drive 10,000 business miles you can deduct $5,600. This method becomes advantageous when your vehicle is a $5000 beater. However, what if you have lived below your means and done well for yourself, and now desire a more expensive vehicle?
The Actual Expense Method Tax Deduction
A better alternative to the mileage deduction method may be to make deductions based on your actual expenses. Actual expenses are considered to be what you spend on your car (i.e. gas, repairs, registration and insurance), and when you sell the car you can deduct capital gains loss (purchase price minus selling price.)
Below is an example of actual expenses for my recently purchased Audi S5. I will then compare it to the basic mileage deduction.
For this calculation let’s assume that the car is driven 10,000 miles per year for 5 years, and then sold.
- Audi S5 price: $63K in cash
- According to Kelly Blue Book, a 5 year older S5 with 50K miles is worth ~$33K. Therefore, there will be a total of 30K depreciation on the vehicle when sold in 5 years
- If driven 50K miles with gas costing $3.8/gallon and a gas mileage of 22 mpg, I end up spending $8,363 on gas.
- Insurance is approximately $1,000 per year and for 5 years will total another $5,000
- For repairs or maintenance, edmunds.com estimates approximately $3,000
- Registration and inspection adds another $250 over the 5 years.
– The total cost to run this car is $16,613. If I then sell the car to a private party at the Kelley Blue Book value I have an asset depreciation of $30K for a total expense of $46,613. All of this can be deducted from my taxes over the course of those 5 years with the largest deduction when I sell the vehicle.
If I only deducted mileage, 50K miles at $0.56 per mile comes to $28,000 over the course of 5 years. [To be fair, that deduction will probably go up a few cents a year, but it won't change the conclusion-ed]
– This reveals approximately an $18K difference and when paired with the 33% federal tax bracket is an extra $6K I get to keep away from Uncle Sam by using actual expenses.
What About Vehicle Tax Deductions For Personal Use?
Now, let’s say you use the exact same example but use the vehicle only 50% of the time for business… this will cause a 50% difference as you are only allowed to deduct half the amount for the 50% of the time you are using it for business. Also, if you sell your car for less than KBB to, lets say a lucky relative, these figures further improve in your favor. [Of course, the IRS may look at the difference between a fair price and your price and rule that the difference is a gift to the relative, but there is probably some room there for reasonable disagreement about the car's value.-ed]
Now, you might say, “The IRS has specific rules for depreciation and states that you can only depreciate by the amounts they have specified.” Well, for 2013 the IRS allows the following yearly depreciation on your vehicle:
- 1st Tax Year $11,160
- 2nd Tax Year $ 5,100
- 3rd Tax Year $ 3,050
- Each Succeeding Year $ 1,875
Therefore, in 5 years I get to depreciate $23,060. What their specified depreciation does is decrease my cost basis for the car. As long as the car is sold to a private party, the total depreciation is adjusted by the new cost basis. In this example, my $63K car with 5 years IRS stated depreciation is now worth $39,940 and if sold for $33,000, I qualify for a capital gains loss of $6,940. This can be deducted as well.
Let’s say you’re involved in a major car accident rendering your car nearly worthless. The IRS will share your burden as the car will be sold far below $33K, therefore increasing your deduction. [Although, if you were deducting the cost of comprehensive/collision insurance, I don't think the IRS is then going to allow you to depreciate the loss of value that you were insured against. But if you just had liability insurance, that seems reasonable to deduct your loss. I'm sure some of the CPAs reading this will correct me if I'm wrong-ed]
An additional advantage occurs when you have more than 1 vehicle. If you need to utilize the other car for your business driving needs, then you can deduct $0.56/mile on that vehicle, thereby increasing your deductions further.
The last advantage is that the IRS will also shares the cost of modifying the car. If, for example, I opted to install a new exhaust or a bigger supercharger, well, that is counted as a car expense and is also deductible. [Gray area here- perhaps should be taken as an addition to basis-ed]
Note that I do not condone buying vehicles outside of your means. It is not appropriate to spend an extra $1 just to save 33 cents in taxes. Just to be clear, I am a strict follower of WCI advice. If you can’t pay cash then you shouldn’t be driving a luxury car or a sports car, even if you get a deduction for it.
[Editor's Note: Expenses related to a leased car used for business purposes are also deductible, of course. That doesn't mean leasing is better than buying (it usually isn't) but you'd have to run the numbers for yourself to come to that determination. I've run into several doctors whose practice subsidized a vehicle purchase to the point where, especially after-tax, leasing was actually a pretty good idea for them. This is also a good place to remind readers that your commute and expenses associated with it are not deductible. If you work at two sites, the only deductible mileage is the mileage between the two sites, not the mileage between home and site A, or the mileage between site B and home.
The bottom line of this post is that if you have a new, expensive vehicle, it's worthwhile to keep all your receipts and deduct your actual expenses, but if you have a 14 year old Durango like me, you're better off with the mileage. Either way, keep good records in case of audit.]
Does anyone else use actual expenses on their business vehicle? Does anyone have a more tax efficient way to deduct their car? Please share your thoughts.
The major problem with most physicians deducting business miles is the commute issue. Since your first and last trips of the day are not deductible miles, not many physicians we see are travelling between two or more locations, nor do they have a functioning home office that can possibly make the first trip a deductible expense.
See Tax Topic 510 or IRS Pub 463 for more info on this issue, but to quote 510:
“To use the actual expense method, you must determine what it actually costs to operate the car for the portion of the overall use of the car that is business use. Include gas, oil, repairs, tires, insurance, registration fees, licenses, and depreciation (or lease payments) attributable to the portion of the total miles driven that are business miles.”
How many of the driven miles are truly deductible, and then what percentage of the actual cost is then realizable as tax savings?
The $6,940 capital loss discussed in the example likely cannot be deducted in the year the automobile is disposed. Assuming the automobile is either traded in or sold and replaced close in time, then the like kind exchange rules apply and the loss is added to the basis of the new automobile. The rules for like kind exchanges (also known as 1031 exchanges) are not optional and apply to both gains and losses.
I have a 3.5 year old new car, can I use the depreciation as a write off before I sell the car?
If the car isn’t new, or not 14 years old, what is the best method?
You’d likely have to go back and file amended returns to really get benefit from depreciation/actual miles (assuming that there are actual, deductible miles being driven).
The mileage method is simple, straightforward, and hard to beat.
Jude
Ryan,
You are correct in that rule if you sell the car to a dealer. But if you sell to a private party and then go buy yourself a new car that rule doesn’t apply.
Kyle,
To my understanding once you start with the mileage deduction, you are stuck with it. Jude is correct about amending previous tax returns.
Lastly, if you have a home office where you do patient charting it book keeping, that is a legitimate office and therefor commuting from home office to patient care office is a legitimate expense.
Does anyone know if there are any changes for electric vehicles in regards to the mileage calculations? I have been doing the mileage deduction the past 3 years between our 2 offices but after reading this realized the mileage deduction may not be my best deduction. I am also concerned that the mileage deduction may change with EV’s.
Thanks
PS – I LOVE my Tesla even if it was a stupid YOLO purchase in regards to the retirement/investing aspect. I did follow the rule of waiting to buy until I could pay cash though! Ramen noodles every day for lunch 😉
I don’t think the rules are any different for electric vehicles. I suspect with a brand new Tesla actual expenses may be the way to go, especially given your relatively high miles per gallon.
Thanks!
Although your fuel expenses may be difficult to calculate, actual expenses deduction is probably the way to go since the more expensive the car is, the more you get to deduct when you sell your car.
Unless you drive very little for your business, you will find year to year, actual expense deduction may be less then mileage deduction on a car like the Tesla. But because of how expensive the car is, when you add in depreciation in resale to a private party, I assume actual expenses will win out in the long run. You should run your own numbers as described in the article to decide what is best for you.
YMMV
Thanks!
My sister works for a big pharma company and executives are given perks like free car leases. Is this possible with a private practice group with C corporation structure? Or it this too risky and likely increase chances of audits.
Sure, you can do it. But the amount that the car is used that isn’t business use should be taxable to the employee.
One thing to remember though is you get a bigger deduction mainly because of the depreciation. The depreciation expense alone in this example is 30K, which allows the larger write off. Personally, I have an 8 year old Toyota that I drive so my depreciation over the next 5 years might be 5k, not 30k, which is why I use mileage.
Everyone should do the math for themselves, but I find that this argument is used like the home mortgage argument. If you get a new car you can depreciate it and get a tax write off, just like having a bigger mortgage gets a bigger deduction. Unless you are going to be constantly turning over your car and have to have the newest model, you will usually pay more taxes, but pay less overall buying a 3-5 year old car.
Like his example above, the 5 year old Audi with 50k miles is worth about 33k now. So if I buy the car from him at that price, chances are I will come out ahead because I paid 30K less for the car than if it was new. Yes, I will pay more in taxes, but not 30K more.
With all that being said, I do have some friends that wouldn’t ever drive a car that doesn’t smell brand new, so in that case, keep good records and deduct all the actual costs there are!
(Sorry if the post is discombobulated, I wrote in sections between work.)
Who says you can’t use standard mileage and straight line depreciation?
The IRS -see Passenger Auto Maximum Depreciation Rules
http://www.irs.gov/publications/p946/ch05.html#en_US_2013_publink1000107703
I don’t see anything that says that you cannot use the standard mileage rate and straight line depreciation as I said earlier. You cannot use mileage and MACRS.
http://www.irs.gov/publications/p463/ch04.html
Dr. Khan,
Cars provided by someone else can not be used for your own deductions.
Ricky,
I plan to use this car for 8-10 years just like my last Audi. Even then actual expenses is the way to go for me.
You are definitely correct that the math works better the more expensive the car is. I don’t remember the exact cut off of hand, but I think it was somewhere in the $30K range.
Alex, that sounds about right.
The commuting issue knocks a lot of your mileage into the non-deductible category. However, the commute is defined as your first trip of the day to your first stop of the day, and your last stop of the day to your home. Here are ways my accountant said to increase deductible portion:
1) Open a PO Box close to your home and get some business mail there. If the post office is 1 mile from your home and the office is 9 miles further way, then 90% of the trip to your office is now deductible b/c it’s not the first trip from your home. This also ensures that really important mail won’t be lost between the postman and you by a careless employee. The fee for the PO Box is deductible, BTW.
2) Get your gas at a station near your house. The trip home from your office to the gas station is not a commute; only the 0.25 miles from the station to your home. (You probably won’t fill your car up every day, but you get the point. Did your office run out of Band-Aids? Stop at the CVS down the street from your house to pick up a box or two, then drive home. etc, etc
3) If you have more than one location, the trips from one office to the next are biz miles, not commuting
4) Keep really good records, at least for a 3 month period each year. If the IRS challenges you that 75% of your miles are not commuting, you’re got your proof.
CAVEAT: I’m just a doc, not a CPA. Verify all this with your own advisor.
Will this increase the chances of audit? Will an audit stand?
I’d be very wary about following this advice, even if it did truly originate from an accountant. Stops at PO Boxes and gas stations or not, it still smells like a commute to and from work, which is not deductible.
@Toshi, @Dr Khan
Ask you own CPA. It may be a technicality, but that’s the way IRS rules work. Little annoying technicalities. When you can get them to work in your favor, do it.
Dr K, when I was audited about 20 years ago, the IRS had no problem with it. But my acct. is the guy who tells you how to build a watch if you ask what time it is, so the Fed was probably just dying to get the hell outta there.
With 25 years in practice comes success, plus I go to 4 locations, one only 6 miles from home, so I haven’t bothered with this for about 10 – 12 years. It’s tiresome to put $5.00 of gas in your car 2 or 3 times a week (of course, gas was $1.45 in those days)
The stops must be business stops, not personal stops. But yes, that’s the way the law is written. Keep in mind that each little trip isn’t worth much. For example, if you drive 8 miles and get $0.55 a mile. That’s $4.20 of a deduction. So even if you only have a 50% marginal rate, you’re only talking about $2.10 back in your pocket. At a certain point, you’ve got to wonder what your time is worth to even think about stuff like this and keep track of it. But it does add up over the course of the year.
How can one construe a stop to get some gas as a business stop? That’s where I find it hard to follow. PO Box, sure. Gas for a vehicle that’s primarily a personal vehicle? Not so sure that’d fly, and I wouldn’t want to risk an audit over something this small.
Would this work even if you are being reimbursed by your company for the mileage?
For example, I work 90 miles round trip from my home but my parent hospital pays me mileage for this distance. Can I still write it off?
No, it would be considered fraud
No, if you’re getting reimbursed, your company is getting a deduction for your mileage. You can’t get it too. Plus, it’s a commute, which isn’t deductible anyway. Getting reimbursed for your expenses beats a deduction anyway. It’s like getting $1.00 instead of $0.30.
I have a few questions regarding this method.
1) Does this rule apply to purchasing pre-owned cars? For example, if I bought a pre-owned Bentley GT for $160,000 in cash and then sell it 5 years later for $90,000. Can I use a capital gains loss of $70,000?
2) Is there a limit on the cost of maintenance allowed for deduction? (driving a Bentley to work is very expensive on the gas and maintenance)
3) Are modifications deductible? For example, changing the rims/ tires, performance upgrades etc?
Jay,
1) I am no CPA, but the way I understand the law is that you can indeed buy a bently. Now the more sporty the car, the harder it is to prove it is a business car. But a bently can fall in that category.
2) There is no limit to what you can write off in expenses for that car. Even if your car gets 7 miles/gallon.
3) Mods technically are vehicle expenses. I think this part is a little tricky. If the mods helps satisfy a business need it may be a bit easier to prove.
For example you drive clients or other physicians around, or recruit physicians, then maybe having a fancy car helps you do business and therefor a reasonable business expense.
Again, I am no CPA, just some guy who tried to make sense of the law and then asked his own CPA if the numbers make sense.
Perfect timing of this post.
My wife and I are both IC. Our commutes are roughly 40 miles round trip. Because our cars are >10 years old. We currently do mileage deduction to the hospital from our home office (which is used exclusively for charting, billing, CME and other business activities). Accountant initially apprehensive about this, but I did a lot of reading and convinced him this is a legitimate arrangement. I spoke with several accountants/lawyers and the #1 piece of advice they gave me as an IC is do not be afraid of disallowed deductions. So I’m sticking with it.
For now, with the age of our cars I think it’s a no brainer. However, we are looking at buying new cars in the next few years. I suspect they will be $50-80k. My wife wants a luxury SUV and I want a Tesla. As such, I’ wrestling with the best way to take future deductions. At that price, I suspect expenses will be greater than mileage. Mileage wise we easily use the cars for >50% business. For me, it’s almost >75% business.
We live in a high tax state, so I also wonder about the implications of leasing, and seeing if I can deduct half the lease payment if that makes more sense than buying. As we would save substantially on the taxes of purchasing a $50-80k car.
Anyone crunch the numbers for a state like CA?
For cars >$50k in the 33%+ and 9% state tax+ bracket; actual cost vs. mileage? Lease vs. buy for >50% business use?
I’m sure actual cost is better than mileage. The lease vs buy question probably depends on how long you plan to keep the car. If you’re going to buy a new one in 3 years, I wouldn’t be surprised at all to see leasing work out better. If you’re going to keep it for 15 years, leasing is unlikely to work out better.
Just a note if you’re considering a Tesla, there are big federal (and possibly state) incentives for purchase of electric vehicles, and you lose those benefits if you lease. When I’ve dealt with Tesla for clients in the past, they’ve been very knowledgeable of those benefits so check with them about the incentives for your state.
Good point.
I was under the impression that the electric tax refund you get was worked into the lease by lowering your initial down payment required. Not 100% sure though.
No, the incentives don’t apply to leases. Talk to the Tesla folks, they can explain to you exactly how it works.
This is correct. Most manufacturers will lower the capitalized cost for the lease by an amount at least equal to the Federal EV tax credit.
For example, when I leased a Nissan LEAF for my wife, our capitalized cost was something like $10,500 under MSRP, which reflected the $7,500 Federal credit plus $3k or so off of MSRP (via their VPP, as my prior employer was on their eligible list). Residual was calculated as a fixed percentage of MSRP, not capitalized cost, which works in one’s favor.
Is there any options other than mileage write off if I am employed as w2 by the hospital. Secondly I do independent medical exams and deposition. This is thru my own s corp. this corporation only makes about 25k a year and in the past I have not been able to purchase a car. Can I keep money in the corporation and just purchase the car after a few years.
Employees can only write it off as an unreimbursed work expense (Schedule A, subject to 2% of income floor). That’s not going to help you much. For your separate business, you can only write off mileage associated with that business that isn’t commuting mileage. So if you buy a car, use it 50% for personal use, 40% for your employee job and 10% for your business, you only get to write off 10% of the mileage or 10% of the expenses. Does that help? You can’t just buy the car and write it off because you have a business. The car actually has to be a necessary expense for the business.
So if I am a hospital employee that works between 2 campuses 25 miles apart, I cannot deduct mileage? I do not get reimbursed for travel expenses but am on salary. I drive 5 miles to hospital A to round, then 25 miles to a “doctors building” clinic associated with hospital B, then 30 miles back to hospital A for evening rounds, then 5 miles home. I was thinking I would be 80+% business use (10 mile personal commute and then 50 mile round trip for work).
I currently drive a 16 year old beater but was hoping to pay cash for a ~$30k used SUV soon.
**Also, if I buy used and wanted to do actual expenses. Would you still deduct the $11,160 the first year, $5100 the second, etc or do you have to base those deductions off a brand new vehicle, meaning I would get only the $1875 yearly for a 4 year old used car?
What about when I drive 30, 60, or more miles to cover sporting events as the sideline doctor?
Sure you can. It’s on Schedule A and subject to a 2% floor and it’s only for the 25 miles between campuses. Add it up and you may find you’re not getting a lot of benefit for it. But 55 miles is a long way, so who knows. Think of it this way. Let’s say your income is $300K. So that means your first $6K in non-reimburseable work expenses (plus a few other categories) isn’t deductible. At 55 cents a mile, that’s a lot of miles that won’t be deductible, about $10,909. $10,909/55 miles per day = 198 days. See the problem? How many times a year are you doing that drive? So yes, you can deduct it, but don’t expect much benefit. There are a few other deductible expenses (investment expenses for instance) you can toss in there. Might as well run the numbers for you and see if it works out, but it probably won’t. That 2% floor is huge.
I’ll leave your question about how to take the deduction to the author of the post as I haven’t done as much research on the subject as he has (I just deduct mileage for my beater.)
Yes, those miles to the sporting events are deductible. If you’re getting paid as an employee, they’re subject to the floor. If you’re getting paid as a separate business, they’re not. If you’re not paid, perhaps you can claim them as charitable miles, but that’s only 15.5 cents instead of 55-big difference.
I am not 100% positive, but I am pretty sure for used cars, you follow the age in cars rule and not how long you owned it.
For example, you can’t buy a $5K Beater and deduct the whole thing in the first year. You get $1875 per year after the 3rd year of age. Regardless, you get the most benefit when you sell the vehicle to a private party.
What about night or weekend call? If you have seen your office patients during the day and have to go back to the hospital to evaluate/operate, is that mileage deductible?
What if you are taking weekend call and have to go round?
Commuting is commuting whether on-call, on a weekend, at night, for rounding, for evaluating, or for operating. Sorry.
It’s still commuting, even if you go from home to work 10 times in the same day, unless there is a home office.
If you are not self employed, don’t bother thinking about car expenses as a deduction.
If you are self employed, the only way to be able to deduct business expenses from commuting to the hospital is if you have a legitimate office at home. So if you do charting, document evaluation, do your own filing and taxes and have a legitimate office in your house, then commuting from one office to another office is a legitimate travel expense. Again commuting from home to work is not a business expense.
What do you think about deductions for someone involved in telemedicine?
I currently have a home office set up (it truly is an office with a computer and nothing else) where I check my cases each morning (admittedly this is usually not the primary focus of my job but hey, it can be on quiet clinic days)
I then travel between two clinics after checking my cases
I’m an employee and not an IC which I understand limits my deductions thanks to the 2% floor, but I’m still planning on deducting my actual travel expenses (including the lease of my overpriced SUV, which is also 100% for work only)
Thoughts? Thanks
Read the rules and take the deductions you qualify for. If you go to work at your home office in the morning and evening, then what would be a commute for your co-workers now becomes business travel. However, the 2% floor is pretty significant for most docs.
I will be starting a LLC (subchapter S taxation) in 6 months, but need a new car immediately due to the untimely death of my 16 yo beater.
When the new business is created, to deduct the vehicle’s actual expenses/depreciate it, would I have to transfer/sell the car to the business? The new car would be used 75% for business. I know leasing often works out well for businesses, but it seems complicated to transfer a lease from personal to business. I was planning to just pay cash for the car.
That’s a good question. I don’t think it actually has to be owned by the LLC. I deduct business mileage now for my LLC but own the car in my name. If I’m doing it wrong, I’d sure like to know. Thus far the IRS hasn’t given me a hard time about it.
I have 2 vehicles. I bought one vehicle in 2014 when I started practicing as an independent contractor. If I used actual expenses and depreciation in 2014, I cannot switch to mileage method for filing 2015 taxes, right? In mileage method do you still count depreciation of the vehicle as business expense?
I used my second (5 year old) vehicle for business, in addition to the new vehicle mentioned above. Can I use mileage method on this vehicle and actual expense method on the other (new) vehicle)?
Does IRS use MACRS method for depreciating vehicles?
Thank you
https://www.irs.gov/taxtopics/tc510.html
You can switch the next year. I know you can use one method for one car and a different method for the other.
The 2% floor can really be a pain. But what is considered being an owner, IC, employee in the eyes of the IRS? For instance, I make partner in a professional corporation in the year 2017. Objectively this means I now own stock in the corporation, but I also own 1/17th of the group. So given that this is a PC and not a LLC what’s the difference in terms of treatment? In my eyes I’m not an employee that can simply be fired by the board…It takes 75% of stock holders. But I think I’m treated as an employee from a paycheck cause I get a w2…I was also announced as the CIO this week! They are paying me seperate money but going into the same paycheck. I’m getting this in letterhead and opening up a home office. I’m an anesthesiologist and I do a lot of driving and therefore will really capitalize on car deductions now. We work at 5 sites but the home office is the key.
So do I need to do some locums work once a year to get out of the 2% floor? Or do I qualify as an owner/IC now?
You lost me in there somewhere. If you’re the owner of the company, you can deduct business expenses on Schedule C instead of Schedule A even if you are also an employee of the business. Does that answer your question?