Business Management

A CPA Answers: How Can Investors Maximize Car-Related Tax Deductions?

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For those of us who have cars, they are likely one of our bigger expenses each month. Between car payments, car maintenance, toll fees, and gas costs, they can add to up a hefty amount throughout the year. This is probably the reason that some of the most common tax questions that I get from real estate investors relate to cars and how to best utilize it for tax savings.

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This week, I wanted to take the time to go over some of the FAQs that I as a tax strategist get all the time to hopefully provide some useful tips that you can use. Keep reading, as some of the answers to these commonly asked questions might surprise you.

FAQ #1: Should my car be purchased by my business?

For those investors with legal entities, this is a question that I get time and time again. The answer is: it depends. There is a common misconception that in order for car related expenses to be deductible, the car must be owned by a legal entity. Another common belief that I hear is that the car expenses must be paid for with company money in order to be a tax deduction.

The truth is, both of these statements are actually incorrect. The IRS allows you to write off business related car expenses regardless of whether the car is owned by the company and regardless of whether the payment is made by the company. As an investor, you can deduct car expenses that are incurred with respect to your real estate activities.

For example, let’s say you purchased your car in your personal name and you pay for all the gas and maintenance with your personal expenses. Let’s assume that you drove 2,000 miles for real estate activities last year. This means that part of your car expenses relating to those 2,000 miles may be tax deductible to offset your tax returns.

FAQ #2: Can I write off the miles that I drive from home to work?

This is another common question that I am asked on almost a daily basis. The answer is "it depends." Under IRS rules, we cannot write off our commuting miles. So if you are a real estate agent and you work exclusively from your broker's office, then the miles you drive from your home to your broker's office every day is not tax deductible. This is considered commuting miles.

Related: The Ultimate Guide to Real Estate Investment Tax Benefits

Now let’s take another example: Once you get to your broker’s office, it is likely that you then drive around to look at properties, meet with clients, or even drive clients around to look for properties together. In this example, all these driving time and expenses from your broker’s office to these various locations are considered tax deductible items.

Here is yet another example: Let’s say you work from a broker’s office from time to time, but you also have a dedicated home office where you perform most of your work. In this scenario, the drive from your home to the broker’s office becomes tax deductible expenses. In addition, all the expenses of driving from the broker’s office to the various locations are also tax deductible.

In fact, if you have a home office, then for the most part, any business related miles from your home office to a secondary location may become tax deductible. I once had a client who was living in San Diego County while he covered the real estate area for all of Los Angeles County. So, a few times a week he would drive over 200 miles round trip for his real estate. Since he had a home office, that made the entire drive tax deductible for this taxpayer.

FAQ #3: Do I have to keep my receipts?

The answer is… it depends, of course!

No one likes to keep receipts. I completely understand that, and I am no exception to the rule. All those little pieces of paper take up room in your purse or in your car.

Clients often ask me if they should keep receipts if they are taking the standard mileage deduction for their car expenses. The answer, as you may have guessed, is “it depends.”

One of the perks that the IRS provides is the ability to take the larger tax deduction of standard mileage or actual expenses. In addition, they allow the taxpayer to potentially change between the two methods from year to year. For example, if the standard mileage provides you with the larger tax deduction this year while the actual expense method provides you with the larger deduction next year, you are generally allowed to switch back and forth.

Related: 3 Reasons You Should LOVE the Home Office Tax Deduction

Because of the fact that the IRS allows us to write off the larger of mileage or actual expenses, it generally makes sense for us to keep track of our actual costs and receipts so that we can make that analysis each year. There are also certain expenses that can be deducted on top of standard mileage deductions.

It is not a problem to simply keep track of your mileage and take the standard deduction. Just keep in mind that if you take this short cut method, you may be cheating yourself out of some tax savings. So to maximize your tax saving possibilities, the recommendation from me is to keep track of both miles driven as well as total car expenses. This way, you can make sure that you are not overpaying Uncle Sam.

Have any other questions about deductions when it comes to car expenses?

Be sure to ask them in the comments section below!

Amanda is a CPA specializing in tax strategies for real estate, self-directed investing, and individual tax planning with over 18 years’ experience. She is also a real estate investor of over 10 years with a focus on long-term hold residential and multi-family assets across multiple states. Formerly a tax advisor at the prestigious accounting firm Deloitte in the Lead Tax Group, focusing on tax strategies for the real estate industry and high net worth individuals, and at an international Fortune 500 Company in the high-tech industry in the Corporate Tax department, Amanda’s goal is to help investors with strategies designed to supercharge their wealth building. Amanda’s highly rated book Tax Strategies for the Savvy Real Estate Investor is amongst Amazon’s best seller list. A frequent contributor, speaker, and educator to some of the nation’s top investment and self-directed IRA companies, Amanda has been featured in prominent publications including Money Magazine, Realtor.com, and AllBusiness.com. Amanda was a speaker at Talks at Google and is a 40 under 40 honoree by CPA Practice Advisor, showcased amongst the best and brightest talent in the accounting profession. Her firm Keystone CPA, Inc. was awarded a two-time winner of the Top CPA of Orange County Award by OC Metro Magazine. She is certified by the CA State Board of Accountancy and is a member of the prestigious American Institute of Certified Public Accountants (AICPA) with clients across the nation.

    zac wilson
    Replied over 4 years ago
    Great article on a very confusing topic! Really opened my eyes to deductions I’m not taking just because I was confused!
    Amanda Han Accountant from Fullerton, CA
    Replied about 4 years ago
    I am glad it cleared up some of your questions Zac!
    Sandeep S. Investor from Cupertino, California
    Replied over 4 years ago
    Great article, Amanda (as always)!. Another question that may help lot of investors is that in which circumstances leasing a car may be beneficial compared to buying (in relation to tax deductions).
    Amanda Han Accountant from Fullerton, CA
    Replied about 4 years ago
    Great article idea Sandeep!
    Paul Straub Investor from Hudsonville, Michigan
    Replied over 4 years ago
    Good article, but there’s a couple items of clarity that I think are important to add. You are only allowed to switch back from actual to standard if you used the standard deduction the first year the vehicle was put into business service. If you take actual expenses the first year, you are not allowed to switch to standard. Also, if you switch from standard to actual, you must depreciate on the straight line method. Also, if the entity is a partnership or S corporation, the standard mileage rate is not allowed. For partnerships, the expense must either be reimbursed, or taken on the individual’s tax return as an unreimbursed partnership expense (UPE) on page 2 of the Schedule E. However, your operating agreement must state that use of your vehicle will be required and the partnership will not reimburse for these expenses. Otherwise, under audit, the IRS could (and likely would) disallow the expense. For S corporations, you only have the option of taking actual expenses on the business tax return or reimbursing the owner for the business use of their personal vehicle (up to the IRS standard mileage rate). Even if the reimbursement route is chosen, the receipts for actual expenses should be kept. Under audit, the IRS can request actual receipts to substantiate the mileage was legitimate.
    Amanda Han Accountant from Fullerton, CA
    Replied about 4 years ago
    All good points, thank you Paul!
    Jake Lautt from Philadelphia, Pennsylvania
    Replied over 4 years ago
    Paul is correct. Probably one of the most important things is to keep an contemporaneous travel log noting where you went, who you saw and the purpose of the visit for standard mileage. You may recreate this log if audited by the IRS, but it is better to have one that is done prior to an audit. Both from an accuracy and legitimacy standpoint. Also keep a receipt/other documentation showing the odometer reading on your car at the beginning and end of the year, or as close as possible. This will help prove to the IRS in an audit situation that you actually drove that many miles in a year. Remember, proving expenses aka deductions is on you if you are audited. No proof=no deduction.
    Amanda Han Accountant from Fullerton, CA
    Replied about 4 years ago
    Thanks Jake!
    Arthur Mayer from La Mesa, California
    Replied over 4 years ago
    Or, you can have your business sourced to Puerto Rico where the income tax rate is like 4%, then you don’t need any deductions
    george
    Replied over 4 years ago
    Wow, making my business licensed in Puerto Rico while operating in the states? Now that’s an idea. So travel to the “home office” would be deductible? That depends, I am sure. FUEGO POPULAR
    Amanda Han Accountant from Fullerton, CA
    Replied about 4 years ago
    Make sure you consult with your tax advisor first George.
    Rahul
    Replied over 4 years ago
    If you drive your car or other vehicle for business purposes, you can take a mileage deduction of 57.5 cents for every mile you drive for work. Check out the IRS official website: http://www.irs.gov/Tax-Professionals/Standard-Mileage-Rates If you own an iPhone milebuddy app can greatly simplify your daily mileage tracks. https://itunes.apple.com/us/app/milebuddy-mileage-tracker/id567680604?mt=8
    Rahul
    Replied over 4 years ago
    If you drive your car or other vehicle for business purposes, you can take a mileage deduction of 57.5 cents for every mile you drive for work. Check out the IRS official website: http://www.irs.gov/Tax-Professionals/Standard-Mileage-Rates If you own an iPhone milebuddy app can greatly simplify your daily mileage tracks. https://itunes.apple.com/us/app/milebuddy-mileage-tracker/id567680604?mt=8
    Amanda Han Accountant from Fullerton, CA
    Replied about 4 years ago
    Thank you Rahul for the link and the app, what a great resource!
    Cameron Seni from Denver, Colorado
    Replied over 4 years ago
    Very relevant article. Thanks all for sharing.
    Amanda Han Accountant from Fullerton, CA
    Replied about 4 years ago
    You are welcome Cameron!
    Jerry W. Investor from Thermopolis, Wyoming
    Replied over 4 years ago
    Great article Amanda, Thanks for taking the time to share it.
    Amanda Han Accountant from Fullerton, CA
    Replied about 4 years ago
    You are welcome Jerry!
    Cameron Benz from Puyallup, Washington
    Replied almost 2 years ago
    So where does purchase of said vehicle land in this murkiness?