Automobile Decision Tree

By Jason Watson, CPA
Posted Saturday, September 7, 2024

In deciding whether to own the automobile personally or through your small business or rental property, here is a set of examples to help you make a decision. It is not a hard and fast set of rules but will provide some guidance.

First, let’s establish the bookends. On one end is the $100,000 luxury auto that you barely drive, and you recycle automobiles every 2-3 years. This is clearly business owned.

On the other end is the $30,000 modest automobile that you drive a tone of miles, and you keep automobiles for at least 5 years. This is clearly individually owned and deducted using the standard mileage rate.

Armed with that information, here we go-

Example 1

You like big fancy cars that cost $100,000 and you only drive 5,000 miles for the business or rental property. Degradation of value is a way of life simply based on time so this automobile will go down in value, and as such you might as well get a tax deduction for it. Ergo, have the business or rental property activity own it. In other words, if you have already budgeted for the degradation of automobile value you might as well get a tax deduction for it, right?

Example 2

You are frugal and therefore you like to buy used Subaru’s costing around $20,000 and you drive the wheels off the thing because you are a real estate agent. Degradation in value is not as severe as example 1, so in this example you should own the automobile personally and use the standard mileage deduction.

Example 3

You like big heavy trucks that cost $100,000 and you drive 12,000 miles for the business or within your gaggle of rental properties. You would like to save some taxes this year as well (shocking). This is a great example of using Section 179 plus bonus depreciation to deduct a big chunk of the truck.

Example 4

Same as example 3, but you expect your income to dramatically increase next year versus this year. In this case, have some patience and purchase the truck next year to match the excellent tax deduction against the higher income. We know, patience stinks. Our job is to build your wealth and save taxes over your lifetime… not just today.

Example 5

You buy a lightly used SUV that weighs over 6,000 pounds for $50,000 and you drive it 6,000 miles per year. Yuck. This is right in the middle of “no man’s land” where the decision is not obvious. Yes, you can deduct a large portion of the $50,000 since the Section 179 expense and bonus depreciation deductions are not based on a new automobile, just new to you.

But recall that depreciation is a tax deferral… if you sell your business automobile for $40,000 a few years later, you will have depreciation recapture on the $40,000 taxed at ordinary income tax rates. To make matters worse, IRC Section 1031 Like-Kind Exchanges no longer apply to personal property since Tax Cuts and Jobs Act of 2017 so you can’t trade it in to kick this depreciation recapture can down the road. In other words, you need to buy another automobile to avoid being taxed on the recent automobile you just sold or traded in. Talk about chasing your tail.

It might behoove you then to own this automobile personally and get a mileage reimbursement from the business. Then again, if you have an unusually high income this year perhaps deducting it in full today makes sense. Again, “no man’s land” since the decision now has a ton of variables and what-ifs.

Example 6

Same as example 5 but you keep the automobile for 10 years and drive 15,000 miles. This changes the narrative. Since you will be owning it for so long with so many miles, the standard mileage deduction is the way to go. In other words, own it personally and deduct mileage for the business miles you drive.