By Trent Derrick, CMT
A business vehicle deduction alone can lead to tax savings but, keep in mind, auto depreciation should be factored into your small business plan to maximize the benefits you can receive.
In general, a vehicle depreciation deduction is rooted in the idea that a vehicle’s value declines due to normal wear and tear, and that you are entitled to recover the cost of the vehicle, over time, if you use it for business or investment purposes. (1)
There are, however, many rules and exceptions to the rules surrounding this deduction, and many people find the details a bit murky. That’s where I can help. I can help explain your options and integrate auto depreciation into your overall business plan.
Here are a few of the most commonly asked questions and answers about vehicle deductions and auto depreciation. But, my team and I can answer any other questions and concerns you may have.
Should I Use the Standard Mileage Rate or Actual Expenses Method?
Will the standard mileage rate or the actual expenses method give you a larger deduction? Which method is easier? More complicated? That depends on a few factors and can be assessed by a financial expert who understands the real financial impacts.
To use the standard mileage rate, you’ll need to keep track of your mileage. The IRS sets the standard mileage rate each year; you can multiply your mileage by the standard mileage rate to know what your deduction would be. Keep in mind, if you choose this method, you cannot claim a depreciation deduction or deduct your individual car maintenance expenses because these expenditures have already been factored into the rate.
The actual expenses method allows you to deduct the cost of using a vehicle for business or investment purposes, plus depreciation. While this may result in a larger deduction, to qualify you must comply with all of the recordkeeping requirements. You’ll need to keep track of expenses like gas, oil, repairs, tires, insurance, registration fees, licenses, and depreciation (or lease payments). (2)
What Is Depreciation Recapture?
When and if you want to sell a business vehicle, it’s important to time the sale or disposal to avoid depreciation recapture, if possible.
Depreciation recapture simply means the IRS is allowed to collect taxes on any profitable sale you make on the vehicle if you previously used the vehicle’s depreciation to offset your taxable income. (3)
Recent tax law changes no longer allow for this tax to be deferred. Since this can be a complicated timing decision, I can help you understand the process and take the appropriate steps.
I’m Here to Help
My team is passionate about helping small business owners thrive. I know small businesses are the lifelines of their communities and I am honored that they trust me and my team to develop the most innovative financial services to fit their specific needs. If you are interested in seeing a financial plan that works for you, please reach out. Book a consultation with me here or email me at email@example.com.
About TrentTrent Derrick is a financial advisor and Chief Market Technician at Legacy Wealth Management. Trent is passionate about the value small businesses bring to their communities and specializes in serving small business owners by providing seamless financial advisory services tailored to their financial needs, including tax planning, cash flow management, retirement planning, and bookkeeping. Trent has a bachelor’s degree from the College of Charleston and studied economics at the University of South Carolina, Columbia. He is a Chartered Market Technician® (CMT). Trent serves as a guest lecturer for the College of Charleston’s MBA program and acts as chairman of the Market Technician Association’s Charleston chapter. When he’s not working, Trent, a proud Eagle Scout, enjoys volunteering with the Charleston Animal Shelter’s outreach program. Trent and his wife love to cook international cuisines and host dinner parties with their friends. To learn more about Trent, connect with him on LinkedIn.