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As a real estate investor or a business owner in the real estate industry, you likely use your car for business purposes. Between repairs and maintenance, insurance, gas, tolls, parking, and payments, cars can be expensive. It’s important to have a solid understanding of the car tax write offs related to business expenses. Doing so will grant you tax write offs, and that's what this post is all about.
Car Business Expenses Must Be Related to Rental or Business Activities
Before you can deduct your car business expenses, you must use it for business purposes. Using your vehicle for business purposes simply means that the trips needs to be for your rental or business activity. Personal trips are not deductible.
Under audit, the IRS will scrutinize your trips. Any sort of personal trip will be disallowed. Personal trips include trips to the gym, grocery store, and commuting to and from your place of business.
That last part is important to understand. If you travel from your home to your rental property or to your office, that's a personal trip. You cannot write off the mileage or actual expenses associated with that trip. This is a common mistake amongst real estate investors and especially agents.
A business trip occurs when you travel from your place of business to another location for business purposes. The key here is that you started at your place of business. Whether you travel from your rental to the bank, Home Depot, or another rental, costs associated with these trips will be tax deductible vehicle business expenses.
Tax Write Offs Increase With a Home Office
Having a home office completely changes the landscape of car tax write offs for business expenses. Above, I noted that traveling from your home to your place of business is considered a personal trip and is not deductible. But what I didn't mention is that you can change that.
By adding a home office to your residence, you are effectively changing the nature of trips to and from your home. Because you now have a home office, trips to and from your home are considered business trips. This is because you are travelling "office to office." Your car expenses associated with such trips will be deductible.
This is a big strategy I try to implement with my clients. Adding a home office is easy enough, but the home office needs to qualify as your principal place of business. Your home office will qualify as such as long as you are performing management and administrative tasks within your home office. If you meet clients at your home office, that's even better.
Related: Why Hiring a CPA is Key to Your Long Term Success
A large part of tax deductible vehicle business expenses hinges on your ability to set up a home office. This is key when doing business or investing locally. If you do not have a home office, the trips to and from your home are considered a personal trip. It doesn't matter if the trip to and from home was for business purposes. Without a home office, the IRS considered it a commute. Commuting expenses are nondeductible.
Standard Mileage vs Actual Expenses
Generally speaking, the actual expense method will yield higher results than the standard mileage rate method. The key here is feasibility.
Documenting your actual expenses takes time. You need to set up a system that works for you and maintain receipts. You need to log your miles to determine how much of your car use is applicable to your business.
It's even worse when you don't keep up with it all year. Then, at year end, you are trying to recall expenses, compile documents, and get them over to your CPA. This takes up even more time, and as we all know, time = money.
On the other hand, the standard mileage rate is a good alternative. Today's technology, such as MileIQ, make it very easy to record your personal and business miles. They automatically log your data so that you can generate reports at year end. No more scrambling to get documents out the door.
If you choose to use the standard mileage rate, you must do so the first year you use your car for business purposes. In later years, you can always switch to the actual expense method. You cannot start with the actual expense method and switch back to the standard mileage rate method. Choose wisely.
Feasibility is a huge factor when determining which method you wish to use to write off car business expenses. Don't devalue your time simply to save a bit extra on taxes.
A List of Qualifying Car Business Expenses
Say you want to use the actual expense method. Knowing what you can deduct will help you document the expenses throughout the year. I've compiled a list of common car business expenses for you.
- Gas
- Oil
- Maintenance
- Repairs
- Tires
- Licenses
- Insurance
- Rental or Lease Payments
- Depreciation
- Garage or Parking Rent
- Vehicle Loan Interest
- Registration Fees and Taxes
- Tolls and parking fees
Note that the last three items can also be tax deductible vehicle business expenses under the standard mileage rate method. Yet another factor to consider when determining which method to choose.
Document, Document, Document
The key to any sort of car tax write offs will hinge around your ability to document everything. Documentation is key. Documentation is good. Document everything.
For car business expenses, we want to document receipts and invoices for all items in the list I provided you with. Documentation can be maintained virtually by means of snapping a picture or scanning receipts. Once you have a receipt stored virtually that you can easily read, you can go ahead and toss the paper one.
Related: The Number One Way to Boost Tax Savings
Using the standard rate requires documentation of both personal and business miles. Smartphone apps like MileIQ will help you do this.
Even if you don't use the standard mileage rate, it's going to be a good idea to document all miles anyway. This will allow you to easily determine a "business use" percentage. You will then apply this business use percentage to general car business expenses, such as repairs and maintenance.
In the event of an IRS audit, you'll need to produce your receipts and mileage log. The mileage log must be contemporaneous. This means you must "record as you go" which is where a good mileage app comes into play.
But hey, if you are a documentation king, you'll have little to worry about.