Owning a vehicle in my LLC: Tax Questions!

8 Replies

My wife and I have an LLC which holds a small portfolio of single family homes. I am considering purchasing a vehicle to be titled in the LLC. My thinking is that the deprecation + gas + insurance + maintenance is, in total, much larger of a tax shield than simply taking the standard mileage deduction, at least for the number of miles I drive.

My questions are: How do I treat personal miles driven? Also, are there a minimum number of miles I must use the car? Could I use it for exclusive purpose of the business an only put on 1,000 miles? There are easy simple iPhone apps that can make business/personal miles easy to track. I would assume personal miles create a tax liability by mile driven based on the standard rate.

What is the standard deprecation schedule for a vehicle in an LLC? I believe it is 5 years but am not sure if it is treated as a straight line schedule, meaning 20% per year. Finally, do any vehicle maintenance costs need to be capitalized? Tires, for example, have a useful life more than one year; however, this may be over-thinking it.

Even after depreciation, my rental business is creating a lot of taxable gains so I'm trying find reasonable ways to lower my taxable income and owning a vehicle is one of those strategies.

Thanks for you help fellow BP-ers!!

@Drew Whitson

I've owned quite a few vehicles in my business (mainly work trucks & vans) however I've only owned one car. The IRS can more suspicious of personal use when you own a car in your business depending on what you do and where you do it. I travel a triangle from Cincinnati, to St Louis, to Chicago quite a bit so most of my miles are actually business travel (about 90%). I believe your CPA can add up all of your mileage and make a determination of what percentage is business use and what percentage is personal use. Just to reiterate, records are very important when you factor in personal use.

  • You need to keep a mileage log...you can use apps like milebug to make the process easier however I find this to be the hardest part of the process. If you don't have a mileage log the IRS can dismiss your write offs. Each trip needs to have a business purpose.
  • All expenses should be paid for out of the business. I would imagine you could pay for it personally and get reimbursed with the proper paperwork by your business however it's just not as clean.

I believe there are maximums on depreciation per year that can change. There are a lot of different IRS codes that give bonus depreciation on certain vehicles. I'm still somewhat unclear on this and would love some clarification from others in the group.

*No tax or legal advice

Thanks Chris! I've been using the app called "EZ Tripper" which also allows for notes with each trip and can be exported to Excel.

Follow up question for you: when you have fully depreciated your vehicles, have you done a 1031 exchange into your next business vehicle to avoid the depreciation recapture on the sale?

This IRS publication will answer most of your questions -

http://www.irs.gov/pub/irs-pdf/p463.pdf

This excerpt sounds like it will apply to you:

If you use your car 50% or less for qualified business use, the following rules apply.

  • You cannot take the section 179 deduction.
  • You cannot take the special depreciation allowance.
  • You must figure depreciation using the straight line method over a 5-year recovery period. You must continue to use the straight line method even if your percentage of business use increases to more than 50% in a later year.

Contemporaneous documentation is key. If there is legitimate business use then your daily updated log will hold up. Simply saying mileage was 10,000 on 1/1/14 and 20,000 on 12/31/14 and approximating a business use percent will be scrutinized by the IRS. Standard mileage rate is 56.5 cents per mile. You can take bonus depreciation (expense 1/2 of the cost) in the first year placed in service (some exceptions) and depreciate over the remaining life which is 5 years for autos. Once you begin depreciating an auto and take other actual expenses you can't go back to taking mileage. It's either or. In many cases the standard mileage rate is a greater benefit if you intend to keep the auto in the business for a long time and do lots of driving.

To further expand on Nick's post. there are limitations on the amount that can be depreciated any given year.

Thanks everyone, I was able to read the IRS Publication and get most of my questions answered. Since the vehicle I intended to purchase is not new, there are meaningful limitations on how much can be deducted.

Originally posted by @Account Closed :
Standard mileage rate is 56.5 cents per mile.

Actually . . .

Beginning on Jan. 1, 2014, the standard mileage rates for the use of an automobile are:

  • 56 cents per mile for business miles driven (down from 56.5 cents, which was in effect for 2013)
  • 23.5 cents per mile driven for medical or moving purposes (down from 24 cents, which was in effect for 2013)
  • 14 cents per mile driven in service of charitable organizations (no change from prior years)
Originally posted by @Drew Whitson :
Thanks Chris! I've been using the app called "EZ Tripper" which also allows for notes with each trip and can be exported to Excel.

Follow up question for you: when you have fully depreciated your vehicles, have you done a 1031 exchange into your next business vehicle to avoid the depreciation recapture on the sale?

We've administered 1031 Exchanges on many cars, trucks, vessels, airplanes, etc. Generally, when you are dealing with cars, the 1031 Exchange involves fleets. Doing a 1031 Exchange on a single car can be done, but is not always cost efficient - just depends on the taxable gain due to depreciation recapture.

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