Waterford Business Solutions

Vehicle Write-Offs Mileage, Depreciation or Lease

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Vehicle Write-Offs Mileage, Depreciation or Lease

As the fourth quarter approaches, many business owners wonder what adjustments or tax plans they need to make in October, November, and December to minimize their tax liability. This is the best time to sit down with your tax planner, or your CPA, to begin looking at options that you can then implement during the 4th Quarter.

One option many business owners are considering is for their company to obtain vehicles. With this option, how can they best maximize vehicle expenses to lower their taxable income? Would a vehicle mileage deduction work better, or would a vehicle lease? What expenses can be deducted under each option?

There are basically three types of vehicle write-offs you can use on tax returns. We’ll overview each of these three types, along with the pros and cons of each.

Mileage

Pro

If you are self-employed and have no other employees, or if you have your own vehicle and use it for both business and personal use, this will be your best option.

If you have a vehicle with very efficient gas mileage, it will be a great deduction and could offset most of your vehicle costs.

This is your safest option if you are ever audited by the IRS, as long as you keep a log of miles driven.

Con

If you use this vehicle for both business and personal purposes, the IRS will want to know how much you used it for strictly business purposes in an audit. If you expensed all of your mileage for the year, instead of just the business-related portion, then you may be subject to back taxes and penalties for overstating your expenses and under-reporting your income.

If you use the mileage expense, you cannot pay for the following additional vehicle expenses through the business: gas and fuel, vehicle maintenance, vehicle insurance, or vehicle registration.

This may not be a large deduction if you use a vehicle with inefficient gas mileage, and it may not offset much of your vehicle’s excessive wear and tear.

Best Practice

If a vehicle has mixed use, keep a log of your business mileage for the year. At the end of the year, take the Current Mileage Deduction provided by the IRS, multiply it by your business miles, and take that as your expense.

Depreciation

Pro

Vehicle maintenance, gas, insurance, and vehicle registration are all considered business expenses.

If you have a vehicle with inefficient gas mileage, or an older vehicle with more maintenance costs, this will allow you to offset more of your vehicle costs.

You can use accelerated vehicle depreciation or a more standard depreciation schedule.

This is the most flexible option, and you can tailor it to your specific tax strategy.

Con

Depreciation is based on the business use of the vehicle. If the vehicle has mixed use, it will reduce the depreciation expense a company can take. Another factor affecting depreciation expense is whether the vehicle owner has another vehicle to use while not working.

If the vehicle is used for both business and personal purposes, then vehicle maintenance, gas, insurance, and registration must be expensed by the same percentage of business use as the depreciation.

If you use this vehicle for both business and personal purposes, the IRS will want to know how much you used it strictly for business. If you expensed all of your depreciation for the year, instead of just the business-related portion, then you may be subject to back taxes and penalties for overstating your expenses and under-reporting your income.

Most difficult to prove in an audit that this percentage of business use is valid, and you are more likely to be subject to back taxes and penalties for overstating your expenses and under-reporting your income.

Best Practice

If a vehicle has mixed use, keep a log of your business use to support the percentage you claim for depreciation and vehicle expenses in the event of an audit.

Lease

Pro

You can take the monthly lease payment each month as a business expense.

Vehicle maintenance, gas, insurance, and vehicle registration are all considered business expenses.

You don’t need fourth-quarter tax planning for the vehicle.

Con

You cannot take any depreciation expense on the vehicle because you will not own it at the end of the lease.

If you use the vehicle for both business and personal purposes, you must allocate maintenance, gas, insurance, and registration expenses by the same percentage of business use as the lease payment.

If you use this vehicle for both business and personal purposes, the IRS will want to know how much you used it strictly for business purposes in an audit. If you expensed all of your lease payments and vehicle expenses for the year, instead of just the business-related portion, then you may be subject to back taxes and penalties for overstating your expenses and under-reporting your income.

Best Practice

If a vehicle has mixed use, keep a log of your business use to support the percentage you claim for lease payments and vehicle expenses in the event of an audit.

Contact Us

If you are looking for more help on tax planning and what vehicle strategy will best maximize your tax savings, please feel free to reach out to us here at Waterford Business Solutions. We can walk you through different options and even set up a tax consultation. You can call us at 864-351-0852 or email info@waterfordbusines.com.

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