ELITE ADVISOR BEST PRACTICES
Maximize Business Mileage Deductions by Using More Than One Personal Car for Business
Many advisors and clients overlook the fact that a car doesn’t have to be used solely for business to qualify for business vehicle tax deductions or depreciation.
By Glenn Demby
- Most of your clients probably know they can deduct or depreciate the costs of operating and maintaining a car they use for business.
- But what your clients probably don’t realize is that they don’t need use their car solely for business to qualify for business vehicle tax deductions or depreciation.
- As long as they keep mileage logs, clients can deduct/depreciate the business mileage they put on their personal cars.
- Better yet, they may be able to significantly increase business vehicle deductions/depreciation by using more than one personal car to conduct business.
Why should your clients settle for tax deductions that come with having a business vehicle when they can increase them by having two or more—especially when getting those extra deductions doesn’t cost them an additional penny or require them to drive one additional mile?
Spot the lost tax savings opportunity
Ivan Newford, owner of a solo consulting firm, uses his personal car, a $30,000 BMW 320i sedan, for business. In fact, almost 90 percent of the mileage Ivan puts on the car is for business purposes. Ivan likes the Beemer so much that he buys the same model with the same $30,000 price tag for his wife, Lisa. Although Ivan will take Lisa’s car for a spin on occasion, he never uses her car for business. Ivan claims deductions for business use of his own car.
Question: What did Ivan do wrong?
Answer: Technically, nothing. Ivan’s was an error of omission rather than commission. More precisely, it was a tax savings opportunity missed. By using both his car and Mrs. Newford’s for business, Ivan could have increased his maximum deductions from $30,000 to $60,000.
How the two-car strategy works
To implement the strategy, all your clients have to do is drive both cars for business purposes. This way, they can claim deductions on both cars—regardless of which deduction method they use (i.e., IRS mileage rates, actual expenses or expensing under Section 179).
Unfortunately, the two-vehicle strategy won’t work for everyone. To use it:
- The client must put more miles on both cars than his/her spouse (the person who drives the other car) does. This is no hurdle if the client is unmarried or is otherwise the only user of both cars.
- The cars must also be at least somewhat close in adjusted cost basis.
Even among those who can use it, the strategy will benefit some of your clients more than others. Consider the following example.
Bottom line. Using the two-car strategy netted Ivan $12,976 in new deductions! And he didn’t have to spend any extra money or drive any additional miles. All he had to do was know the rules—or have an advisor like you who knew the rules for him!
Help your clients cash in
Revealing the tax savings opportunity to your clients should make you a hero. But there are two things you need to do.
Step 1: Explain the formula
First, show clients just how much money, if any, they can pocket using the two-car strategy. All you need is a simple four-step formula comparing the “before” and “after” pictures as we did above. Here’s an illustration using that example.
- Business miles. Before, Ivan was using just one car for business to the tune of 28,000 miles a year. Once he starts alternating his business driving between Car 1 and Car 2, he divides his business mileage in half between the two vehicles.
- Total miles. This includes both personal and business use. Ivan is still driving the same 38,000 miles. But after he switches, his total mileage (like his business mileage) is divided evenly between Cars 1 and 2.
- Business percentage. Before, Ivan drove Car 1 93.3 percent for business; after, he drives both cars 73.7 percent for business.
- Cost of cars. Your clients will almost surely know what they paid for their cars. This gives you an opportunity to make a “quick and dirty” calculation of the potential savings. You can also drill down deeper by using the adjusted basis of the vehicles (think trades and vehicles already in use). If they traded in the car they had previously owned for the car, they might want to consider using their adjusted basis because it will differ from the original basis.
Caveat: If your client is using IRS mileage rates on a leased vehicle, the formula won’t work because the client is stuck with the mileage rate over the life of the lease. But the formula does work with a leased vehicle on the actual expense method.
- Estimated sale proceeds. Here, the client has to make an informed guess about the estimated net proceeds he expects from the sale of each car in the future.
- Tax deductions. The difference between purchase price and sales proceeds yields the net cost of owning the car. Multiplying the net cost by the business percentage gives Ivan the net tax deductions for each car. On tax returns, Ivan realizes the business percentage of his net vehicle costs in the form of:
- Expensing under Section 179
- Gain or loss on sale
Step 2: Make sure clients keep mileage logs
Last but not least, tell clients to maintain careful logs to track the business mileage they put on each car. Of course, to the extent that clients are already deducting business miles on mixed use cars, this should be a familiar exercise.
Owning two cars and running your own small business is like baseball and apple pie. Folks groaned when the IRS tailored the tax rules to the American dream by making taxpayers keep logs to document business and personal mileage. But while the requirement increased the paperwork, the mileage log became a windfall to the extent that it created the opportunity to accrue business vehicle deductions and depreciation on multiple mixed-use vehicles. Because multi-vehicle deductions are an opportunity that so many small-business owners overlook, it often falls to you, the financial advisor, to deliver the news. But if being a hero in your clients’ eyes is the price you have to pay to help them save on business taxes, it’s a sacrifice you’ll just have to make!
This article was adapted with permission from MurrayBradfordTaxInstitute.com, a site dedicated to helping self-employed taxpayers and one-owner businesses save on taxes.