Business vehicle tax question

[Sue J]

This question pertains to my son. He is 28 and is a freelance sound engineer, filing a Schedule C - Sole Proprietorship.

He has a 1999 Subaru Forester (160,000 miles) that he uses for his business and he has been using the standard mileage deduction. His business mileage has been around 68% of his total mileage and his mileage deduction is usually his biggest business expense.

He's looking into upgrading to a newer Forester, maybe a 2006 for about $9000-$10,000. He asked me to look into any tax benefit of his business buying it rather than it being his personal vehicle. Now, we both know that he is his business, so it's just a matter of if it would save him anything on his taxes.

Looking at taking the standard mileage rate vs the actual vehicle costs (including the deduction for depreciation) the two amounts are very close. The actual costs would only be larger if he had a major repair or bought new tires.

Is there another way to handle a vehicle in a business? A friend of his who has a much larger business told him he always has his business buy the vehicle and then he takes the depreciation and actual expenses. But he has another vehicle for personal use.

My son buys equipment for use in his business (microphones, antennas, sound mixers, cables, etc) but none of it is being depreciated, it's always qualified for the section 179 expense. His vehicle has always been personal and he takes the standard mileage rate for his business miles.

If I'm looking at this wrong can anyone point me in the right direction? Can a 9 year old car be purchased as business equipment like the mics and mixers? And would that have any advantage?

I'm thinking that having it be a personal vehicle and continue to take the standard mileage rate is the best way to go.

 

[aaronc879]

This is only my third year being self-employed so i'm no expert. That being said, if the vehicle is used for both business and personal then i'd use the standard mileage rate of $.56/mile. In 2014, my business mileage was over 70% of total mileage and by far my biggest deduction. I would've had a smaller deduction using actual expenses and it would have been much more of a hassle to track. With mileage, you don't need to keep receipts. You just need to keep a log of when and where you went and how many miles it was.

 

[target2019]

Answer is quick, and simple. Open tax program and enter the car purchase. You can take it as section 179 so long as you are under the limit, and/or depreciate. Add other allowable auto expenses. Enter the requested mileage info. The software should help you pick which method is advantageous. There are several factors used, so it is in his best interest to make the calculations, and not assume mileage is always the better method.

 

[Sue J]

Thanks for the responses. I think I'm asking the wrong question, or asking it the wrong way.

If you take the section 179 deduction, it's only taken once, in the year of purchase. In that year and subsequent years, you can still take the deduction for operating costs, (most likely standard mileage rate), correct?

Or...you take depreciation for 5 years and compare actual (including that years depreciation) vs standard rate.

I did put the info into a 2014 tax program to compare results. I'm just not sure as to how a vehicle purchase is handled vs using a personal car. His taxes have been fairly simple so far.

 

[pb4uski]

Just from memory, if it is mixed use the total costs (including applicable depreciation) will be multiplied by the percentage of business use based on business mileage divided by total mileage. So if he puts on 15k miles a year his total costs of ownership would have to exceed $8,400 (15,000 * .56) in order for using actual costs to be beneficial compared to the 56 cents mileage rate.

I would think that in most cases the standard rate would be preferable, plus the recordkeeping is much less onerous.

YMMV

 

[GrayHare]

Memory of this is hazy and perhaps the rules have changed: once a vehicle is fully depreciated, isn't the subsequent rate-per-mile deduction lower?

 

[target2019]

It's complex, or can be.
http://www.smbiz.com/sbfaq024.html

If you just use straight mileage, it is simple. But you may not get the deduction you can.

For example, you can use part of the purchase cost towards Sec 179. I recall having done that.

 

[Sue J]

We have a complete understanding of standard mileage vs actual costs and the prorating of personal vs business. What I'm unclear on is if there is any advantage to having it be a business owned vehicle vs a personal owned vehicle.

If the small depreciation on a 8 yr old $10,000 car (at 68%) doesn't bump the actual costs over the standard mileage then does it matter how the car is owned?

Is it typical to have a car as section 179 expense property? All his expensed property has been equipment used in his business activity, nothing cost more than $1000.

He already owned his current car when he started his business and the standard rate was always the obvious choice. Every year we do a ballpark estimate of actual vs standard. The standard rate seems very generous.

It's complex, or can be.
http://www.smbiz.com/sbfaq024.html

If you just use straight mileage, it is simple. But you may not get the deduction you can.

For example, you can use part of the purchase cost towards Sec 179. I recall having done that.

Thanks for that link. That may be what I'm looking for.

You cannot use the standard mileage rate if you:

• Use five or more cars at the same time (as in fleet operations),
• Claimed a depreciation deduction for the car using any method other than straight line, for example, MACRS,
• Claimed a Section 179 deduction on the car,
• Claimed the special depreciation allowance on the car,
• Claimed actual car expenses after 1997 for a car you leased, or
• Are a rural mail carrier who received a qualified reimbursement.

 

[target2019]

Another interesting piece is how the car is insured--Business or personal use.
1. He is using the car for business, and the insurance company wants more for that use.
2. They may not cover business equipment in the car.

 

[Sue J]

Another interesting piece is how the car is insured--Business or personal use.
1. He is using the car for business, and the insurance company wants more for that use.
2. They may not cover business equipment in the car.

Good point. I know he left our Geico policy and got his own policy a few years ago, I will ask him about that.

There have been a few times when he has his car loaded with expensive gear. It's usually not his own, it's from the company that hires him and he loads up the night before and drives to the gig in the morning. In those instances he does not want to park outside at his apartment. Instead he parks his loaded car in our garage, borrows DHs car for the night to go home and then comes back very early in the morning to pick up his loaded car and drive to the gig.

He lives less than 2 miles away so this is close and easy. He has learned to make this switch very quietly because it's usually before we wake up

Thanks for all your help.

 

[Rickt]

The fact that he has one car that he uses for personal and also for business use, I would suggest that he take IRS' standard mileage allowance. Keeping a log of mileage for business use is easy enough and the mileage allowance will more than take care of his vehicle expense. I have used my vehicle for business use for the past 20+ years and always claimed standard mileage allowance. Thanks.

 

[MooreBonds]

Another interesting piece is how the car is insured--Business or personal use.
1. He is using the car for business, and the insurance company wants more for that use.
2. They may not cover business equipment in the car.

Usually, when you get a quote for auto insurance, they always ask if you use it for business use. That is because there is a lot more liability exposure to the insurer. I'm assuming the insurer knows he drives his personal car for business use? Assuming that's the case, he's already paying more for his auto insurance than if it were just for personal use.

The other complication is that if the equipment is another company'sassets, then their insurance policy would also take a stake in the losses if it were stolen. they might go after your son's auto policy and/or homeowner's policy (if theft occurred at your son's home).

 

[gauss]

Isn't a $9,000 vehicle a capital asset and not allowed to be taken in the first year of purchase as an expense? Mics and cables may be consumed in less than one year and may be expensed in the first year (ie not capital)?

Note my thoughts on this are not from any first hand experience of TaxPrep in this area but rather as purchasing items for MegaCorp (capital acquisition process vs expense items for purchases).

-gauss

 

[target2019]

This article explains more. Good idea to check IRS also.
http://www.aicpa.org/publications/taxadviser/2015/february/pages/tax_trends_01.aspx
After a few paragraphs of reading I remind myself I am not a tax expert, or an expert in anything really...