Hey, everyone.
Eric Freeman here again to talk to you today about auto expenses.
It may sound too good to be true.
Deducting the full cost of the auto in the year you buy it for tax purposes.
But it's true.
We just have to make sure that we know the rules.
That way you can take advantage of it.
And of course, this has to be for the use in your business.
And so we'll go through the methods on how you actually come up with the deduction,
the different possibilities you have and which one may be better in your case.
And by the time we get to the end, we'll see and we'll have a good idea
on which autos you can deduct fully what potential limits there are.
So you can take advantage of this for your business.
Before we get into the specifics on how you can take advantage of these auto
deductions, it's important to know a couple of details.
For example, you want to keep great logs on your business mileage.
This is an area that historically has been highly contested by the IRS
because taxpayers have taken advantage of it in the past.
So there's specific
questions on the tax forms that ask you if you keep this information
to substantiate your deduction to help you keep track of the mileage.
There's various apps that you can use, and these will help you
track what your business, Miles, are versus your personal.
You can even keep notes in them on what
the business purpose was for that in the locations that you went.
Makes it very easy nowadays to keep track of all of that.
So you definitely want to do that in case you get audited.
You're able to show the IRS that these are true business, Miles,
and that you were allowed these deductions.
The second thing is you want to keep receipts for your actual
business expense is related to the auto.
So if you purchased a new car, you want to keep the purchase documents.
You want to keep any kind of receipts for the gas or the oil or the repairs.
Because what you'll see is these are deductions that are included.
And so, again, if you're going to get potentially question
on those, you want to make sure that you have support.
And then lastly, you want to make sure that you know,
which Miles actually count for business first personal
because if you're using an auto that is part for your business
and part for personal use that you're using on the weekends for something
you want to make sure that you know the difference between those miles.
Because certain miles like commuting from your home to your principal office
location, and those aren't necessarily business miles.
But if you go from the office to a client location or a lunch with a client or
something, of that and back to the office, all of that is business.
Miles, of course, going to the grocery
store from your house is not going to be a business mileage.
It's easier to substantiate your mileage if you have one auto for the business
and one for personal.
Of course, it depends on your business.
The needs the auto that you needed for both your personal life
and your business life.
Because, of course, you don't want to buy things just for the deduction.
You want to make sure that you figure out the needs of the business
and then figure out how do you make it deductible.
So now we're going to go into more of
how you actually calculate this deduction and how you can take advantage of it.
There's two main ways to calculate your mileage deductions.
The first one is your standard mileage which is a much easier calculation.
You still need to track your business miles versus your personal miles,
or there's your actual expenses.
And this is where you're actually totaling up the costs that you incurred
to maintain the vehicle, to purchase the vehicle for the gas
and everything like that.
And then figuring out the percentage that is for business use
and then deducting that portion.
Like I said, the first option is your standard mileage for 20, 22.
The IRS has set the rate at 58 and a half cents every year.
This gets adjusted to a different rate.
You want to check each year which rate is applicable.
This is a very simple calculation.
You just track your miles, your business miles.
For example, if in 20, 22 you were to drive
10,000 business miles, the rest was all personal.
It simply take 10,000 miles multiplied by the 58 and a half set rate.
That the IRS gives us each year, and you'd have
a $5,850 deduction.
A lot of times people may not be aware of that,
but if you're using your auto for
your business, especially driving around for rental properties,
checking on them, doing repairs, managing, meeting tenants, anything like that,
you want to make sure you're tracking all of that because that's an easy
deduction that you want to take advantage of and not miss out on.
The second method is the actual expenses and the actual expenses.
It's typically more beneficial when you've bought a car.
And this will allow you to potential offset more of your income
because this is where we'll be able to deduct the entire cost
of the vehicle, as you'll see when we get to the end.
So I've listed some of the most common expenses
that you could deduct that are related to a business vehicle.
So you have your interest or your lease payments.
So obviously if you finance the vehicle you own it
outright and you're making interest payments on it.
The interest portion, not the principal portion, is deductible.
Or if you've leased a vehicle, then
the full amount of your lease payments is deductible.
And then of course, you're going to have insurance expense
so you can deduct that you have repairs periodically.
So any time anything goes wrong, you could potentially deduct
that your gas, your oil if you get car washes, hopefully
keep it clean registration, all of those expenses that are related
to owning and maintaining a vehicle Now, the last one is depreciation.
And we all know
from watching the videos that this is one of my favorite deductions.
So this is where we will get the big benefit
of deducting the full cost of the car.
As you know, depreciation, typically you have to take those deductions
over time.
And this means in the case of a vehicle, you're
typically deducting the cost of the vehicle over a five year period.
However, there's special allowances for autos.
Now, if you're interested in the specific code sections,
you'll probably hear it thrown around or if you've searched on Google
for how this works.
You know, Section 179 is the code section
that gives us a lot of these deductions when it comes to vehicles.
But essentially, what it says is that
you can deduct the full cost of equipment, which includes
vehicles in the year of purchase if it's used for business.
There are certain limitations.
So, for example, you have to use the vehicle
for at least 50% or more business to get
any type of special depreciation allowance.
There's also certain limitations on the type of vehicle that you purchase.
Historically, this has been an area that some taxpayers have taken advantage of.
And, you know, they would buy these nice cars, Ferraris or
Range Rovers or whatever else you can think of.
And really, they were trying to finance some of their personal costs,
but call it business.
And so they try and take advantage of these deductions.
And so there were limitations put into place
so that you couldn't deduct all of it if you're saying it was for business.
But if you're buying vehicles, generally vehicles
that way, over £6,000, you can deduct.
And when it comes to pickups, if it's over
£6,000 and has a greater
bed length greater than six feet, there's no limitations on that deduction.
If it's less than a six foot bed, then you're potentially limited
to a 25,000 maximum which most
you know, if it's a new vehicle is probably going to cost more than that.
So you want to make sure
that you talk to your CPA before you purchase a vehicle
because that may affect your decision if you're able to write it off fully.
And that vehicle makes more sense for the business.
Of course, specialty type vehicles like vans
and things that may be used for delivery, there's not any limitations on that.
So you can take advantage of this.
And of course, if you're not using the vehicle 100% for your business,
then you won't deduct the full amount of these expenses.
You'll take a percentage.
So, for example, if you drove 20,000 miles for the entire year
and that was your total mileage let's say 10,000 of that was for business purposes,
that gives you a business use percentage of 50%.
So you take 50% of all of these expenses and that would be
your deduction to the business, which can make a big difference.
So obviously if you're using the car for 100% business, that's where
you'll really take advantage of writing off the full cost of the vehicle.
But not only are you writing off the full purchase cost of the vehicle,
with these special deductions under the IRS code that allow
you to, you're also writing off
all the other expenses associated with owning the vehicle.
And it's important to know that you can write off
the full cost of the vehicle even if you financed it.
That's really an important thing because you're using the bank's money.
You haven't actually come out of pocket if you've financed it,
but you're still deducting it as if you had
hopefully you were able to watch this video before you purchased the vehicle
so you could take advantage of this and maximize your deduction.
I hope this helped and gave you a lot of tips for on your next vehicle purchase
I look forward to seeing you in the next video.
Be sure to like comment, subscribe and I'll see you all next time.