All Things Tax

All Things Tax

Like the title says, from the filing process and tax questions to tax policy and reform, you can search and share All Things Tax here. This is the place to find answers to all your general questions that don't fall under the other categories. And just a reminder: questions about software or online filing should be posted in DIY Products.

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Pioneer
Posts: 2
Registered: ‎05-14-2018

Vehicle for Business and Personal use by Sole Proprietor

Hi,

 

I am purchasing a new passenger car that will be used both for business and personal use.  I expect to use it about 50% for business.  In past years, for an older model vehicle with relatively low value, I used the Standard Deduction for Business Miles.  Since I drive about 5000 business miles per year, that allowed a deduction of approx.  $2800.00.  But since the value of the new car is about $45,000, it occurs to me that depreciation allowances could be quite significant.  Add to that the issue of sales tax (about $1300.00), insurance, and possibly other vehicle-related expenses, and it seems that using the Actual Expense method might be better than the Standard Deduction method, especially during the first year.  I understand that if I start with the Actual Expenses method, then I will be stuck using that for each subsequent year.  My main question is:  Which method would provide the best long-term benefits?  I am not sure yet, but I think that depreciation will occur over a five-year period.  What happens after that?  Since I am a Sole Proprietor (and not a corporation), when I purchase the car, does it matter whether I use funds from my business bank account or personal account?  Should I purchase the vehicle under my business name or personal name?  Are there any other tax considerations I should be aware of before purchasing the vehicle?  Thanks so much for your kind response(s)!

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Associate (Neighbor)
Posts: 220
Registered: ‎07-22-2014

Re: Vehicle for Business and Personal use by Sole Proprietor

Hello, RobertJ61, and welcome to the community.

 

I'm going to start with your later questions, and work backward...

 

Since you're a sole proprietor, I can't think of any reasons to register the name under your business name.  If the vehicle were going to be used only for the business, then it would make sense, since there would be a clear paper trail in case of an audit - having it registered through your business would make it clear that it is a business vehicle.  Since it won't be solely for business...it's probably less hassle to purchase it in your own name.  Also, as long as you're the sole proprietor, whether the funds for the come from your personal or business account is immaterial.  (Just don't forget to make the payments!)  Smiley Happy

 

Vehicle depreciation is taken over a 5-year period, so using the actual expense method would provide a greater deduction initially.  Depending on how long you plan on keeping the car, and how expensive you think the upkeep will be would be the "wild card" in trying to estimate whether it would be better to use the standard mileage rate or actual expenses.  After year 6 (5-year depreciation actually takes six years - half a year in the year of purchase, then four full years, then half a year in year #6), your expenses would take a big dip, since the depreciation of the vehicle wouldn't be part of your expenses any more.

 

For most people, taking the standard mileage deduction is the better option - especially if you plan to keep the car for more than just a few years.  Using the standard deduction is also much less time-intensive, since the only detail you need to track is the business mileage.  If you use the actual expense method, everything that goes into the vehicle is tracked - oil changes, fuel, tires, windshield wipers, insurance, etc. - and then the expense calculations are run based on the percentage of miles that are actually business related.  For example, if your total miles for the year are 15,000, and business miles account for 5,000 of that, then 33% of the total expenses would be allowed as a business vehicle expense.

 

My recommendation:  keep track of all your expenses for this year (keep receipts!), and do a quick calculation in December to see which set of numbers will work out to your advantage - without taking depreciation into account.  My guess is that the standard mileage rate will end up being better.  Adding the depreciation will boost the actual expense by about $2000 this year ($4000 for the following four, then $2000 again).  That will probably swing the balance toward using actual expenses...but will the difference be enough to make up for the value of your time spent keeping track of all of the vehicle expenses?  That's a question that only you will be able to answer.

 

Hope that helps!  If you have more questions, don't hesitate to throw them at us.

 

-kurt

Pioneer
Posts: 2
Registered: ‎05-14-2018

Re: Vehicle for Business and Personal use by Sole Proprietor

Thanks, Kurt, for your very informative and thorough reply.  I really appreciate it so much!  I just have one main question regarding depreciation, which I believe will have a very significant impact on my decision whether to use Actual Expense or Standard Deduction method.  I understand that depreciation will occur over a five (or six) year period if Actual Expense method is used.  I mentioned that the purchase price of the vehicle would be about $45,000.  So what would the total depreciation allowance be?  Is there a limit, perhaps based upon some percentage of the initial value, like say, 50%?  I ask because in your response, a total depreciation of about $20,000 was indicated, which is less than 50% of the initial value of the car.  I suppose it might be unreasonable for me to expect 100% depreciation over five years, since the car will likely last at least twice that amount of time, but I just need to be sure what the total depreciation allowance would be.  Using the Standard Deduction method would likely yield a deduction of about $2800, based upon 5,000 miles/year.  But it seems that the Actual Expense method, during the middle four years would yield a much larger deduction, based upon the $4,000 depreciation allowance plus all other vehicle operating expenses.  If my understanding is correct, it looks like I could expect an Actual Expenses deduction of at least $5,000 to $6,000 per year during the four middle years.  If true, that is about twice the amount allowed for the Standard Deduction.  Is my understanding basically correct, or have I missed something?

 

Kind Regards,

 

RobertJ61

Council Member
Posts: 548
Registered: ‎04-06-2016

Re: Vehicle for Business and Personal use by Sole Proprietor

I'm not too versed in using the actual expenses method for depreciation in a situation like yours but there are a few things I am aware of that you should know, or at least look into in more detail.

 

1) I think there may be a minimum business use % of the vehicle that dictates how, and if, you can depreciate it.

2) You can only take the depreciation on the business use % of the vehicle, so assuming you can depreciate the full value of the car over 5 years (which I'm not 100% sure of) using straight line depreciation, that would be basically $9,000/year. If your business use is 60% for the year then the depreciation you could claim for your business would be 60% of $9000=$5400.  

3) There are limits on the amount of depreciation you can claim on "luxury" automobiles.  I think the limits changed with the Dec tax law, but you should look into this.

4) You'll need to keep good usage and depreciation records, because if you do take business depreciation and then later sell the vehicle you'll have to recapture (or include in your business as income) any depreciation the business took based on the sales price of the vehicle.   So if you fully depreciate the vehicle after 5/6 years and then sell it for $25,000, you'll have to recapture (or basically claim as business income) any depreciation you claimed on that $25,000 (which would be $15,000 if your business claimed 60% of the depreciation each of the 5 years) in the year you sell the vehicle.

 

Karen

 

Associate (Neighbor)
Posts: 220
Registered: ‎07-22-2014

Re: Vehicle for Business and Personal use by Sole Proprietor

Hello, RoberttJ61.

 

The depreciation figures I used were based on 50% business use of a $40,000 vehicle - I didn't have a calculator with me (or the depreciation tables), so I just made the math easier to do in my head.  Smiley Happy

 

If the vehicle's price is actually $45,000, then the full-year depreciation amounts would be closer to $4500 than $4000 - again, this is figuring 50% personal use and 50% business use.  If the percentage actually swings a bit heavier to business use in any given year, then the depreciation would also increase.

 

To flesh out the actual expense figures, I'll use your 5000 miles business use per year, and do a 50/50 business/personal use split.  Again, using numbers pulled out of my head - let's say you get 25 miles per gallon (just because it makes the math easy) at an average cost of $3/gallon (again, to keep the math easy), and change the oil three times a year at $60 a pop. 

 

(Years 2-5)

Depreciation (based on $45,000) - $4500

Fuel - 5000 miles / 25 mpg = 200 gallons x $3/gallon = $600

Oil changes - 3 x $60 x 50% = $90

 

Actual expenses would add up to $5190 (this leaves out things like wiper blades, tires, battery, etc.)

(Years 1 and 6 would have half of the depreciation amount, which would give you a total of $2940.)

(Year 7 and beyond would have no depreciation remaining, so your deduction would be $690.)

 

Standard mileage rate (using the current 53.5 cents/mile) would give you a deduction of $2675.

 

The total depreciation that would be allowed over the six years that the vehicle depreciates would be 50% of the initial price (assuming that the business use stays right at 50%), so the total depreciation would add up to $22,500 for a $45,000 vehicle.

 

Hope that helps! 

 

-kurt

Associate (Neighbor)
Posts: 220
Registered: ‎07-22-2014

Re: Vehicle for Business and Personal use by Sole Proprietor

One more little tidbit...

 

If the business use were to drop below 50%, the method used to calculate depreciation would change - and then we'd have to calculate the amount allowed for depreciation.  The amount wouldn't change drastically, but would probably drop by $1000 or so.  As before - I don't have a full depreciation chart handy.  Also, without using specific percentages for amount of business use, that's just a rough estimate based on 40% business use.

 

-kurt

New Member
Posts: 5
Registered: ‎05-23-2018

Re: Vehicle for Business and Personal use by Sole Proprietor

If a sole-proprietor buys a vehicle primarily for business purposes, what is the best way to account for its expenses come tax time, including the vehicle loan/purchase?

New Member
Posts: 5
Registered: ‎05-23-2018

Re: Vehicle for Business and Personal use by Sole Proprietor

[ Edited ]

If a sole-proprietor buys a vehicle primarily for business purposes, what is the best way to account for its expenses come tax time, including the vehicle loan/purchase? The vehicle is primarily used for business about 80% of the time and some personal use approximately 20%.

Basically, you have two options: deduct the standard mileage rate for business miles driven during the year, or deduct your actual vehicle business expenses (80% of your total vehicle expenses) for the year and depreciate the cost of the vehicle over time.