Maximizing Tax Deductions on Vehicle Expenses: An Essential Guide for Painters

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So I had to turn the heat on in my house for the first time today . Really , yeah .

And my kids they're pretty much Nicaraguans at this point , but for Christmas we went to this little Nicaraguan like hotel place that had like a nice pool area and so we thought it would be cool because the kids could go and do the pool thing and play with other kids while us kind of enjoying just you know some time outside of the house and it was probably

about 75 , 80 degrees . But they were all complaining it was cold . They're all like shivering and stuff . I was like completely spoiled by this weather . It's not cold at all , like literally 75 , 80 degrees Fahrenheit right now , and they're like all like bundling up , like acting like it's cold outside .

So that's the problem I have to live with is the kids acting like it's cold when it's 75 degrees .

Unfortunately , those are very set in stone and today I thought maybe we could talk about one of the best tax deductions out there , and that has to do with your vehicle expenses .

So if you're a painting business owner , you are almost certainly using at least one vehicle in your business and that vehicle is going to be one of the biggest sources of tax deductions for you . So we want to make sure that you're taking full advantage of these and you're not leaving any money on the table , sort of speak .

So I thought today we'd talk a little bit about you know what qualifies as a business vehicle deduction . We could talk about the record keeping requirements and the different methods for taking those deductions , mainly like standard mileage rate versus actual expenses .

We're going to try to lay it out so you know in your situation what's probably the best route for yourself , but , of course , always want to seek professional advice for your specific situation .

And if you have a painting business , then driving your vehicle to the job site , meeting with customers , picking up paint at Sherwin Williams or Benjamin Moore these are all extremely ordinary and necessary expenses and you want to make sure that you're getting your full deduction for things like gasoline , tires , maintenance and repairs and even just the value of your

vehicle . You know you place a beautiful brand new pickup truck or work van into service and after five to 10 years it's not worth what it used to be . So we want to make sure that we're getting tax deductions for that . How you're going to do this is going to depend a lot on your business structure .

So if you are a sole proprietor and there you don't have a separate business entity for your company , then you're going to take these deductions on your 1040 Schedule C . That is going to be the most straightforward way of doing it .

If your company is its own business entity so we're talking corporation or partnership or an LLC tax as a corporation or S corp , then we want to .

We can still take these deductions , but we want to make sure that the vehicle is actually titled to the company , because in this case the company is its own separate thing and a company cannot take deductions for a asset that doesn't actually own .

So , especially if you want to do things like bonus depreciation and you have an entity , you want that vehicle titled in the name of the entity . Now , if it's not titled in the name of the entity , it's titled in your personal name . There are ways to work around this .

You know , mainly , you're going to want to use an accountable plan to reimburse yourself for using your vehicle , and that is something you definitely want to talk to your tax professional about , especially if your vehicle is being used for personal and business use .

It can get very , very hairy on trying to tease out the business portion and the personal portion and you might leave some deductions on the table there . So talk to your tax pro about that .

So they're using , they have a business use and they also have a personal use . So you're basically saying we want to make sure we get the tax deductions from the business use portion for the folks that are using their personal vehicles .

And then , obviously , if you're , if you have a vehicle dedicated specifically to business and it's usually for the larger painting businesses , a million plus at least those obviously are tax deduct deductible .

But I think a lot of the confusion is when you're you have a personal vehicle titled in your personal name but you're using it for both personal and business .

You know , if we are taking business deductions for gasoline that we burned on a family vacation or even the portion of our truck that we use for personal things , that could get us in big trouble if we were to be examined . So , yeah , number one rule if you've got a mixed use vehicle , you need to separate out personal from business .

The IRS is very keen on that . They have an IRS term for property , or , yeah , property that can be mixed use . They call it listed property and I'm not quite sure where listed comes from , but it means things that can be used for both business and personal . So they're very well aware of that .

And then the other thing is you know , you need to understand , you know what constitutes business use and what constitutes personal use . So driving to the job site , going on sales calls these are obviously , you know , business use . Something that is not business use but feels like it might be , would be commuting .

So if you have an office space that you run your company out of and you're driving from your home to your office , that's considered a commute and that is not business deductible . But once you leave your office and you start going out into the field to do your sales calls or to go to the job site , that would be deductible .

If you have a home office , then the minute you leave your house you're leaving your office to go out into business . So that's kind of a nice benefit to a home office . But keep in mind that you can't have both . You have to have either a home office or an outside one .

If you're using an area in your home for exclusively and regularly for business , then hopefully you do have a home office set up and that could be just be a room that's exclusively in debt and regularly used for the , you know , for your business , and so basically that's a cool bonus Because , like you said , as soon as you leave your home , your reckon miles

for the business , as opposed to not having one . Then you can only start the clock for your mileage which we'll talk about here in a second Once you hit the paint store or get to the customer's house , whatever it is .

So just being on the phone conducting business does not turn your trip into a business trip . Well , you know you mentioned the standard mileage rate and that sort of thing , so maybe we could talk about

the two . You know primary ways that we come up with these business deductions and that is the standard mileage rates and actual expenses . So standard mileage rate is a simplified method of figuring out your deduction where you get to deduct 65 and a half cents for every business mile you drive .

That 65 and a half cents covers pretty much all of your vehicle expenses . So depreciation , gasoline , tires , repairs , insurance it's all covered by 65 and a half cents . The only thing that you could add to that would be parking fees and tolls . Those could be additional . The actual expenses is just like the name suggests .

It is your actual gasoline cost , your actual repairs and maintenance insurance and the actual depreciation on the vehicle . So that is going to be a little bit more complicated , because we need to keep records of every time we buy gas and we need to know what our vehicle is worth and how to depreciate it .

But sometimes actual expenses can be more valuable not always , and we'll talk a little bit more about that later . But one thing to keep in mind is that if you like the idea of the standard mileage rate which in my experience is usually more beneficial for painting business owners , but your mileage may vary Sorry , bad pun .

If you want to use standard mileage rate , you need to do that in the first year . Right , we're gonna start off with standard mileage rate . Once you start with standard mileage rate , you can switch to actual expenses . But once you go actual expenses you can't go back to standard mileage rate . So it's a one-way street .

So when in doubt , standard mileage rate , if you're just starting out , that's probably going to be the best solution . The only time I would think you can correct me if I'm wrong is actual expenses actually make sense is when you have a pretty expensive vehicle .

But most of the time , you know we painting contractors , especially getting started , it's just an average cost pickup truck that they're putting a lot of miles on and so that a lot of those miles you know that racks up them against the standard mileage rate .

So most cases that's going to be the method you would want to go for because that's going to give you the best return on your taxes .

Generally , if you have a vehicle that has like low to moderate operating costs so it's , you know , not a gas guzzler , it's moderately priced , so the depreciation on it is average You're not spending you know $500 to have the oil changed every three months like you might on a , you know , high performance vehicle your standard mileage rate is probably going to be

better because standard mileage rate is based on an average . So average fuel costs , average depreciation , average repairs If your vehicle is a little bit less expensive to operate than average , you're going to do better off with the standard mileage rate . On the flip side , maybe you have a very expensive vehicle .

So the analogy or the example I like to use is imagine a doctor who owns his own practice and he drives a you know Porsche , 911 , $200,000 car that gets you know six miles to the gallon and he only drives it maybe 20 , 30 miles a week to his , to his office and back . He's going to do very poorly on the standard mileage rate .

His actual expenses are going to be very , very high . That Porsche is going to depreciate like crazy , the repairs are going to be very expensive and he's going to have very few miles to deduct . So he's going to want to do actual expenses .

You know that's kind of an extreme example , but you can see how you know actual versus standard would play out with a low-cost vehicle versus a high-cost vehicle . One thing people talk about a lot is accelerated depreciation .

So vehicles are one of the most expensive things we're going to buy for our business and sometimes we want to take that tax deduction as much as we can right up front and there is some ability to do that with accelerated depreciation . That's where , instead of stretching out the value of that car over five years , we're going to take most of it in year one .

Now to do that , you do have to use actual expenses . Standard mileage rate will not work for accelerated depreciation . The other thing we want to consider is that the IRC section 280F places limits on how much you can depreciate in the first year If you have a vehicle that weighs less than 6,000 pounds curb weight . So that's going to be most of your sedans .

A lot of half-ton trucks are going to fit into this category , you know , moderate-sized SUVs . The most you're going to be able to depreciate in year one is $20,200 for 2023 . That number will go up for inflation each year , but it's around $20,000 . So if you have a $50,000 vehicle and you want to take $20,000 up front , you can .

You'll stretch the remaining $30,000 over the next four years . If your vehicle is a heavy vehicle , so it weighs greater than 6,000 pounds and that's curb weight , that's empty like , say , a large work truck or a large work van , then that is not subject to limits and that could be fully . Now let me walk that back .

It could be your depreciation would be higher In 2023 , we have bonus depreciation . You could feasibly do up to 80% of the purchase price of that vehicle . Next year that's going to drop to 60% and then 40% .

So buy a new vehicle for the business and reduce my tax liability and this is true assuming it's going to be used in the business and you put it into use for the end of the year . The thing to keep in mind is does it make sense for your situation ? Because you're taking a lot of the deductions right away .

So if you're the next year your business grows , there's not much deductions left for that vehicle because you took a lot of it up front or in that year . So if your plans are to grow or scale quickly , that may or may not make sense , depending on the situation , what you're trying to accomplish from a tax perspective . So that's just something to consider .

Yes , you can buy a vehicle and put it into use in the business and get a big deduction if you go with the actual expense method . But that may or may not be the right move from a tax planning perspective .

So if we sell that vehicle or we trade it in or we take it out of the business for our own personal use , we need to account for that value . So , for example , $50,000 vehicle , we've accelerated depreciation and we've depreciated it by $40,000 . Now we sell it for $20,000 .

Well , we've got $10,000 of depreciation that we took a tax deduction for , but we didn't actually use up that vehicle . We would have to recapture that and that means adding $10,000 of income to our tax return .

So if you plan on trading in your car or truck every two to three years or you think you're going to take this vehicle out of the business relatively soon , you're probably not going to want to accelerate depreciation because you'll end up in a situation where you'll have to recapture it later on , or in other words repay it later on .

Yes , yes , repay it later on ? Yeah . So you know , definitely something to talk to your tax professional about . I , as you can tell , I can get really into the weeds on this sort of thing and running projections trying to figure out , you know , do I want my tax deduction upfront ? Is it better to save it for later years , when my tax bracket is higher ?

How will I dispose of the vehicle ? Lots of things to take into consideration when it comes to actual expenses . So another reason why I think standard mileage rate is best for folks who have , you know , relatively simple businesses and lower cost vehicles .

But whether you're doing mileage rate or actual expenses , the one thing you're not going to be able to get around is the record keeping and documentation . So this is the IRS we're talking about . Everything has to be recorded , and that includes the miles that we drive .

So we need to keep some kind of a mileage log to show , one , how many miles we drove in total and , two , how many of those miles were for business and how many were for personal .

There are a few things that the IRS really pays attention to that you really do need to have put in place .

Like to use an example , if you're , if you're buying things from Sherwin Williams , you don't need to worry about saving the receipts from Sherwin Williams One because they have a portal that has all that information in there and then , if you're doing the bookkeeping properly on , that is pulled into your bookkeeping software .

So not too concerned about receipts for that . But like vehicles and meals and stuff like that , those are scrutinized more closely Because of the the component of it you know for for vehicles specifically has that personal component can be used for personal purposes .

So you got to pay attention to the record keeping part for vehicles because that's going to be top on the list when you get audited that they're going to investigate .

So , unless your business , unless your vehicle is , you know , 100% used for business and there is absolutely no personal use , like , let's say , the vehicle is not suitable for personal use . We're talking vehicles , like you know , work fans that have no backseat , or you know , flatbed trucks or things like that .

You have to keep some kind of a mileage log so as you can show the personal versus the business . Now , I know record keeping is a pain in the neck and we want to try and make it as simple as possible .

If you are doing standard mileage rates , then you can keep track of those miles and not need to worry about receipts for gasoline , repairs , insurance , that sort of thing . If you're doing actual expenses , you're going to have to keep records of everything , because if we want that deduction we have to have the paperwork to prove it .

One you know ways in which that you can track your miles . There's basically , you know any . Any record that you find useful

will work Most people use like paper logs . You can buy these neat little log books from you know Office , max or Walmart . You could jot the numbers down in a notebook if you want . Or if you want to be a little high tech , there are some apps that you can use on your cell phone .

Mile IQ is one that a lot of people like , and it can use your phone's GPS to track your miles for you and then provide you with reports . So that could be a little bit of a time saver there .

So I definitely recommend software for this If you're doing any kind of , unless you're just one of those people that , like we were talking about this before . I guess , richard , your wife really likes to do the paper logbook , which I think she's the exception to . Not most folks like to do that kind of thing .

So unless you're really into that type of thing , mylineq is probably , or something like that is gonna probably be your best bet . It's because it's gonna save you a ton of time . We were just doing the numbers on how much time if you're doing a few estimates during the day and some production .

You know if you're doing it paper logbook style , you know it's gonna take tens of hours every year . You know we estimate some around 70 hours a year if you're actually writing and doing it per the IRS guideline . So that's probably not the right way to go if you're doing , unless you're maybe just starting out .

If you so if you're , you know , doing some any sort of volume , probably need to get MyLineQ . If you're doing MyLage and it's gonna , basically it's a swipe left or right personal business and it's gonna be a lot easier to cut down your time , you know , to you know , by 80% . So definitely recommend getting some sort of automation there to track your miles .

So there's this you know kind of famous tax court case Hebron versus the commissioner where you know , mr Hebron was claiming these vehicle expenses and the tax court actually disallowed them because he did not have enough documentation . So we wanna have a written log .

Written is so key that the IRS will actually ask you on your schedule , see , do you have evidence , yes or no ? And if yes , is it written ? Because it must be written . For it to be allowed , that written evidence needs to have the you know amount of miles that you drove .

You know preferably starting odometer and ending odometer and I think mile IQ does a good job of that the date that you traveled and also your business purpose . And when we say business purpose we don't wanna just write down business trip after every log . That has been done in the past and it has been disallowed for , you know , insufficient information .

It doesn't have to be a paragraph , but you know Johnson Project , you know Mr Hoover sales call , something like that . To give a little bit of a distinction as to why you were driving would be sufficient .

So hopefully , you know , our conversation today has given you a little bit of a better understanding of the importance of vehicle deductions . You know again , this is I'd like to emphasize this because of all the business deductions you're gonna take in your painting business , your vehicle is going to comprise a very large portion of them .

You know it's probably only going to be , you know , second to say , like material costs and labor . When it comes to expenses , we wanna make sure that you're getting as much as you can . You know a business vehicle that drives , you know , 10 or 20,000 miles a year .

Say you drive 20,000 miles a year , your tax deduction is going to be 65 and a half cents , that's $13,000 that you don't have to pay taxes on If you're in a relatively low tax bracket of 24% . That's $3,144 that stays in your pocket instead of going to the IRS . So and that doesn't even count your state taxes if you live in an income tax state .

So definitely worth doing . Try to make it easier on yourself , if you can by using an app or , if you prefer , a log book , there's nothing wrong with that either . Just ask my wife and she will tell you . But we really certainly appreciate everybody listening today .

If you have questions or comments or suggestions for future episodes , daniel , where would be the best place for people to get ahold of us ?