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Deducting Auto Expenses < 6000 lbs

mcmuney

I own real estate investment properties in multiple states (NV, ID, KS, MO, NE) but it's not under a business or LLC.

I plan on purchasing a car for business use only. It'll be a small SUV that's comfortable for me to drive to my properties. It will weigh lass than 6000 lbs. I've read about the 179 deduction, but I don't want to buy a heavy and more expensive SUV just for the higher upfront deduction.

My question, I'd like to deduct all expenses related to the vehicle, payment, insurance, gas, repairs, etc. What can or cannot deduct?

Would this be a simple deduction or an audit risk?

I also intend of purchasing the vehicle instead of leasing. Do I need to explore leasing and/or a vehicle > 6000 lbs?

Thanks.

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Accepted answers

KristineS

Hi mcmuney,

Sounds like you'll have a lot of driving! Thanks for your question.

Vehicle expenses may be deducted one of two ways: Standard Mileage Deduction or Actual Expense.

You may choose whichever is more beneficial. However, be aware if you choose the Actual Expense method in the first year, you must use that method for all subsequent years. If you choose the Standard Mileage method in the first year you can switch methods back and forth in subsequent years, which may or may not be more ot your advantage.

The Actual Expense method will allow you to deduct the expenses you mention - gas, oil, tires, insurance, etc. The car payment itself is not a deduction, rather you claim depreciation of the vehicle.

With a leased vehicle, you can also choose to claim standard or actual expenses method the first year. However, you cannot change methods in a later year, even if you have a renewed lease agreement. Also, if you choose the standard mileage you cannot claim the lease payment.

You can generally elect to expense the cost of your asset or vehicle as Section 179 property if you placed it in service during 2024 and used it predominantly (more than 50%) for your business. Look at IRS Publication 946 for more detailed information on that.

The IRS has a methdology it follows in selecting returns for exam or audit. Your return can be 100% accurate when filed and still be selected for audit or exam. Accurate recording and documentation of your expenses (and income) is very important to have should the IRS choose to review your return more closely and request supporting information. Check out IRS Publication 463, Chapter 5 "Recordkeeping."

All comments

KristineS

Hi mcmuney,

Sounds like you'll have a lot of driving! Thanks for your question.

Vehicle expenses may be deducted one of two ways: Standard Mileage Deduction or Actual Expense.

The Actual Expense method will allow you to deduct the expenses you mention - gas, oil, tires, insurance, etc. The car payment itself is not a deduction, rather you claim depreciation of the vehicle.

mcmuney

Thank you Kristine! (very helpful)

I was under the impression that Section 179 can only be used for a vehicle that 6,000lbs or greater. It turns out the full vehicle can be deducted if it's > 6,000lbs in the first year oppose to $30,500 maximum deduction in the first year for a smaller SUV below 6,000lbs.

(assume the cost of the vehicle is $50K)

What isn't clear to me is that if I deduct $30,500 is 2024, do I deduct the balance of $19,500 in 2025?

If I don't utilize Section 179, would I just depreciate $10,000 each year for 5 years?

And to clarify, if I use Section 179, the vehicle needs to be used for business more than 50% but if I don't utilize Section 179 and use Actual Expense method, the vehicle has to be used for business 100%?

Thank you.

MatthewD

Hello mcmuney,

If you utilize Section 179 for your vehicle, then the balance of the basis is depreciated over the next 4 years. In the example you provided, the remaining $19,500 is spread out over the next 4 years starting with 2025.

If you don't utilize Section 179, then the software will apply the appropriate depreciation each year. Cars have a 5-year life and use the MACRS (modified accelerated cost recovery system) and a convention of when it is placed into service, so it isn't always an even amount each year as you suggest in your example, but you have the right idea.

To use Section 179, you are right, the asset needs to be used more than 50%. You can use Actual Expense for any business %, including amounts below 50%. However, in order to allocate the right percentage, you must enter all your miles for business, commuting and personal.