Transcription
What's the best method to write off your auto? I get this question all the time. My business owners want to know, mileage, actual. Should I buy an SUV, a truck? What about a Tesla? Oh my gosh, there's so many issues. And if you're a small business owner running a business online, selling a product or service on Main Street America or in virtual reality, the point is, you're gonna have a vehicle and you're gonna drive to Staples or the Apple store once in a while, or maybe even longer distances, or to go meet with clients or whatever, right? Your auto is one of your best tax deductions. Let's break it down and see which method is best for you.
Now, first of all, of course, this is a big topic. So I'm gonna break down the general issues. And I'm gonna pull out the whiteboard here in a minute and give you maybe a little curved graph of sorts that'll really be insightful on helping you decide which method is best for you. But let's break down the methods first and some of the general rules to writing off your auto and then go from there.
Rule number one: You can only write off an auto with a legitimate business. If you haven't made any money yet, you don't have to have profit, but at least a sale. You have to be selling something online or a product or service and have a store, whatever, whatever your business is, it's got to be generating revenue. And we need to have a business purpose for the vehicle. Where are you driving? You're going to pick up supplies, going to meet with customers or clients, or driving employees around? I don't know. But you've got to have that business purpose. I wish average Americans could write off her car, right? No, no. Only business owners. And as you know, I want all of my clients to have a small business on the side so we can be writing off your vehicle, your significant other's vehicle, or even the kids' vehicles if they help out in the business.
Number two: You've got to track the activity or the mileage of your vehicle. If you're gonna go actual, write off repairs and maintenance and fuel, you may say, "I don't have to do mileage." Well, the IRS still wants to know what are you driving your car for. So you're gonna want to do your best to track that mileage. What's personal? When did I go to the grocery store, the movies? What was commuting to maybe my day job or back and forth to the office? And then what was that business mileage? Going to the rehab or the real estate project or go into a conference three states away? I don't know. So at the end of the year, I ask my clients and our accounting firm for just kind of a general breakdown of their mileage. Now, if the IRS says, "We want a written record," and they may, it's quite rare, but you should be able to produce one. And that's why some of these apps out there are pretty cool. There's some GPS type tracking apps that'll help you do a better job of tracking your mileage. Don't turn your life upside down, but do the best you can to show me or your accountant what you're using your car for.
Okay, now once we know that we have a business and we've got a vehicle that we're using for business, for tracking it, number three, we have got to choose between actual or mileage. Now, these are two different methods to be used for writing off a vehicle. And once you choose a method, you're stuck with that method for that car as long as you own it. So if you sell it, buy a new car, you can hit reset and do a different method with that other car or SUV or truck or RV. I mean, oh, so much to talk about. So you need to decide what's just gonna be the best method for me based on the use of this car and the cost of the car. So I've created a really cool graph that's gonna help you out in trying to figure this out.
Okay, now before I go to the whiteboard, another preliminary matter. This is a big topic. And every year I write a blog article on this where I give usually around six to seven or eight options to consider. Should I lease? Should I buy an SUV or truck? And whose car and the family are we using? Are we using all the cars? Which method's best? So check out that blog article link. It's down here below in the video. And some of you may have come to this video from within that blog article. So I tried to link the two. But do a little bit, a little bit of reading on this. I also have on my website at Tax Legal Library with 50, 60 videos for business owners on all sorts of topics. Right now, if your family members, S Corp versus LLC, your home office, travel, dining, you would love it. Huge write-offs there. And it's a great opportunity to up your education a little and hold your accountant accountable, right? So you can bring up some of these topics and know what you're talking about. So do a little more study on this auto thing because I don't want you to think this is the video of all videos that's gonna answer all your questions, but it's definite gonna get your mind racing.
Okay, now into this little diagram that I've created in my mind. And this is one of the first times I've thrown this out on a YouTube video. Let's do a graph here and hopefully this works out here. So let's think of this axis as the value or the cost of the car. So let's put cost of vehicle, how about that? Not car, because we don't know what it's gonna be. So there's our cost of vehicle. It's either zero or it could be 50 grand. Let's say, just hypothetically. If some of you are buying a car, but it's worth more than 50 grand, congratulations. We're gonna go through a different method maybe for you and talk about that. Now, on this axis, what I want to talk about is how much mileage I'm gonna have. Am I gonna have a little mileage or a lot of mileage? Because that's gonna be a big factor. And I want to figure out this mileage that could be in a given year anywhere from zero, let's say 20,000 miles. So what I want to do is let's start out with this cost of a $50,000 car and we're gonna go down to zero. So we're going down and value. And I mean, obviously you're not gonna buy a car for zero, but we're headed out this direction, right? It's the concept here. You're gonna love this. Then over here, we're gonna take mileage and we're gonna kind of increase that as we go across this border. So we're gonna increase mileage on this axis and reduce, go down in cost on this axis.
So here is the amazing thing. The higher the mileage and the lower the cost, I want to do a mileage method because think about it. If I'm gonna try to write it off over time and I'm gonna burn 20,000 miles a year and the mileage this year in 2020 is 57 and a half cents per mile, I mean, that's over a $10,000 write-off in that year. And if the vehicle cost is lower and maybe I even get better gas mileage, that's another axis in here. We could really blow this up. But think about if the cost of the car is used, it's a little lower value, maybe under $30 or $40,000, and I'm gonna have a ton of miles, I'm gonna get better bang for my buck over time just doing mileage. And I get to write off any interest on the auto loan, but that's it. I get mileage and interest on the auto loan. This encompasses insurance and gas and all these things. But by the time you take a car payment and the cost of the car and some gas with a good gas mileage, you're gonna beat it with mileage.
Now, conversely, let's think about it this way. If I have a higher valued vehicle and lower mileage, I'm gonna want to go with the actual method because there I can take an immediate write-off with bonus depreciation or a 179. And I can write off all this gas and the vehicle cost itself. But I'm not going to have a ton of miles, so I'm not getting the kid scooter write-off is this guy over here, this gal, right? Driving a bunch of miles. So I want to kind of be in this range if I'm gonna go actual. Now, I've never seen a little graph like this. This is because I'm such a nerd. I lay in bed at night thinking about this rather than watching Netflix. But that's the craziness inside this Marc Kohler brain. But I think this is a good starting point for many of you as you talk with your accountant to figure out what method should I go with my vehicle.
Now, in summary, you can see I've opened up a whole can of worms. We haven't even talked about leasing the vehicle. And what if you have two or three vehicles available for your use? Right? You could have your spouse's car, your truck, the RV, all sorts of things start to come into play. You can have a motorcycle in the mix. I have clients with airplanes, right? So all this transportation is an important tax write-off. And if you own a small business, I want to be taking advantage of this. And this is something you should take control of. You are the captain of your own ship. And if you're not bringing up this topic with your tax advisor, what kind of advisor do you have? They should be bringing it up to you or reminding you through great YouTube videos or blog articles or webinars or all the other support material we have at our law firm, run accounting firm. Check us out. Please click down below. I've got a free ebook that'll help you get some more tips and strategies on different ways to save money. And if you sign up down below, we'll send you that ebook and you'll get my newsletter every week. That's free. And also, please hit the subscribe button. Get over there and every time I shoot a new video, get it. You'll get a ping. And most weeks on Thursdays, I go live on YouTube and I'm taking live questions from you. So take the time to get into that and see what you think. And I really appreciate you watching this video and make that vehicle a huge write-off on your taxes.