Daniel Honan compares two ways to deduct vehicle expenses: the mileage method at 58¢ per business mile, or tracking actual costs like fuel and repairs. Recent tax changes made depreciation limits higher, so the actual expense method often saves more money now. Use the spreadsheet tool on the website to figure out which works best for your situation.
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Welcome to the Painting Business Finance Podcast, where it's my mission to provide you with the philosophies, tactics, and tools to making your painting business more profitable while creating more wealth for you and your family. This is your host, Daniel Honan, and today we're going to be talking about vehicle deductions. What is the best strategy, mileage or actual costs? Vehicle deductions. This is a common question I get when speaking with clients, just understanding how should I deduct vehicle costs, what is the best strategy, because there's a couple ways to do it. Now first, just want to clarify that this vehicle deduction or auto deduction— this, we're not talking about travel here, we're talking about expenses for your vehicle that you're using in your business. And your vehicle can be a personally owned vehicle or an exclusively used business vehicle, either one. Now there's going to be implications for either of those two options. But, uh, let's dive into the big question. The big question is that I always get is which strategy is best, mileage or actual expenses? It's not an easy question to answer. There's a lot of variables, but I'm gonna go through a few rules that will help you guide you, will help guide you in your decision process. But first off, there's two main options. To write off vehicle expenses. The first one is mileage. So mileage is basically tracking how many miles you are driving your vehicle in your business and on, on the personal side. You track both sets of miles, but the— any business miles, you can get 58 cents per mile in 2019 as a deduction on your taxes. So this method, mileage, in the past has been heavily used and recommended. It's changed a bit now since we're in the new tax law, new tax reform. Now it's a little bit not as advantageous to use mileage. It still is in a lot of situations, but the actual costs method is actually a little bit better now because of the tax reform. And that goes into the next strategy, is actual expenses. So this method of deducting vehicle expenses is, is by using the actual expenses of the vehicle. So instead of just tracking your miles, you're actually tracking fuel costs, repairs, maintenance, insurance, And then also the actual cost of the vehicle that you paid. You went to the dealership and you paid X amount of dollars. That amount you can depreciate over several years. So before the tax reform, the problem with taking actual expenses was that the depreciation amount wasn't very good. It was a very low amount. You couldn't— so you'd have to depreciate over several years, and it wasn't very advantageous from a tax perspective. But with the new tax law, there are higher depreciation limits, and also you have more bonus depreciation as well. So it makes actual— the actual expense vehicle deduction method a little bit more enticing. Now let's jump into looking at the factors that will help you decide whether to take mileage or actual expenses. In general, if you have a lot of business miles on your vehicle and your— the vehicle that you purchased was not that much, so let's say it was, you know, under $10,000, but you are driving 16,000 miles a year, mileage method is going to be what you want to go with. This is because you get 58 cents per mile on that vehicle, and also your vehicle, you didn't pay much for it, so you're not going to get much depreciation because that's— depreciation is based off of how much you paid for the vehicle. That's Situation 1. Now let's look at Situation 2. Let's say that you have an average cost vehicle and you do not have a lot of business miles. So maybe you're the business owner and you just do the sales, you're not driving a lot to a lot of job sites, so you just have an average amount, uh, which is about 13,000 miles per year, and your vehicle amount is around $25,000 is what you paid for it. You— in this case, you might want to go with the actual method because you can take— let's say you bought the vehicle for $25,000, especially if it's a larger vehicle like a truck or van that's over 6,000 pounds. You can take a lot of depreciation up front, so you might want to go with the actual cost method. Now, Situation 3. Let's say that you have a vehicle that does not have a lot of business miles and it's a more expensive vehicle used primarily for business. Um, once again, you should use the actual method, and this is for the same reason. You, your expense, you have an expensive car, maybe it's $35,000 plus. For that vehicle and you don't have a lot of business miles, you want to take that actual cost method. Now let's go through maybe the fourth scenario. You have low miles and a low-cost vehicle that's used for business. In this case, you might— it's kind of up to you, but if you have low miles let's say you're not driving around as much at all, you're a business owner but you work mostly, you know, in the office, let's say, you know, so you're not out in the field, you're not doing sales calls, you might want to go with the actual method. In this case, it's kind of a— you could go either way, but if you're just really not driving at all, probably should go with the actual method and take the depreciation and actual cost of the vehicle. Now let's look at another situation, the fifth situation. Let's say that you are using your car part-time for the business, and then you also use your car on the personal side. And in this case, you'll probably have to go with the mileage method, especially if you're using the vehicle mostly for personal use. In order to use the actual cost method, you have to use it for at least 50% exclusively for business. So 50% or more for the business. Now let's look at another situation, the, the sixth situation. Let's say that you bought a vehicle that is 6,000 pounds or more, so a van, a cargo van, a truck, extended bed. In this case, I'm gonna lean towards actual methods because you can deduct a lot in the first year using bonus depreciation. Plus, those larger vehicles are usually higher in miles per gallon, so those actual costs are going to be higher, which again favors the actual cost method. So let's look at another situation, the seventh situation. Let's say that you have a vehicle that is an electric vehicle. So maybe you're, you're the salesperson in your painting business and you have a fuel-efficient hybrid or electric vehicle and it gets really good gas mileage. You and maybe it wasn't that expensive, maybe you got it used or whatever the case is, uh, you might want to go with the mileage method because your operating costs are going to be much lower. Um, so those actual costs are going to be lower, so you might want to take the mileage, mileage method since you're going to get that 58 cents per mile. So those are some situations to get you kind of thinking about how to understand, you know, which strategy you should take. If you're on the website listening to this podcast, there is actually a spreadsheet that kind of asks you a list of questions that you can select your answer and it will give you the recommendation. But of course, you want to keep in mind that these are just general observations and considerations. You need to consider all the facts of your situation and consult with your tax advisor before choosing a method. But, uh, these are some good things to consider. Well, I hope this was informative, and I wish you the best in your painting business, and I'll talk to you next time. Thanks.
