Mileage vs Actual Expenses for a Vehicle
We crunched the numbers, and over the life of the vehicle, one method can create $30,000 more in deductions than the other. Depending on your tax bracket and entity type, this can mean $10,000 less in taxes you have to pay, so it’s worth getting this right.
Want to make sure you’re not losing $10,000 in tax savings on your business? These five things will help you know if you should take mileage or have your business own a vehicle. The actual calculations can be complex, but you probably benefit from owning the vehicle in your business if:
1. It’s an expensive vehicle
2. You will use the vehicle mainly for business, not personal
3. You aren’t driving a lot of miles
4. You are not going to keep the vehicle more than five years
5. Your vehicle has an “Unloaded Gross Vehicle Weight of 6,000 or more pounds for a car or a Loaded
Gross Vehicle Weight for trucks and vans
When you’re thinking about if you or your company should buy your new vehicle, a really important thing to keep in mind is that you have to track mileage whether you or the company own the vehicle, so having the company own the vehicle doesn’t save you any work tracking your mileage (and if tracking mileage is a hassle for you, you probably aren’t using MileIQ, our favorite mile tracking app).
If you’re going to use the vehicle most of the time for business, then that is one of the factors that might make owning the vehicle in the business make more sense. But, a key thing to understand in deciding what percentage of your drives are business vs personal is that your “Commute” is your first drive of the day from your home to your work and it’s considered personal, not business. We frequently see owners that don’t understand this, and if a big percentage of your miles are for your commute, that might mean you’re better off reimbursing mileage because a relatively smaller percentage of your use will be for business. You still can’t pay yourself mileage for your commute, but this can make buying the vehicle in the company less valuable than mileage overall.
Buying an expensive vehicle in December to save on your taxes can be a good idea. If you do it right, you can get a big deduction for depreciation. But, it’s crucial that you make sure you know the rules before you buy expecting a big tax deduction. Also know that if you sell that vehicle within a few years you might have to recapture that depreciation and count it as income in a future year. Having the company buy a qualifying vehicle can mean a bigger deduction this year, but make sure you consider the total deductions over the life of the vehicle. You don’t want to pay $10,000 more in taxes over the next few years than you would have if you’d bought the vehicle personally and taken mileage instead.