In this episode of the Main Street Business Podcast, Mark J Kohler shifts the idea of buying a car strictly for the write-off into reverse and emphasizes the importance of having a vehicle that aligns with your business needs.
Here are some of the key points that Mark unpacks:
A breakdown of the pros and cons of business owners buying a vehicle.
An in-depth discussion on when it is suitable to buy a vehicle for business purposes to leverage tax benefits.
The significance of ensuring the business can support the deduction for the vehicle.
Example scenarios illustrating the risks of buying a vehicle based solely on the intention of writing it off.
The need for proper legal structuring and insurance when owning a business vehicle.
How the mileage method can be a suitable option for small business owners.
Thoughts on integrating family members' vehicles into business write-offs for tax benefits.
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In this episode of the Main Street Business Podcast, Mark J Kohler shifts the idea of buying a car strictly for the write-off into reverse and emphasizes the importance of having a vehicle that aligns with your business needs.
Here are some of the key points that Mark unpacks:
A breakdown of the pros and cons of business owners buying a vehicle.
An in-depth discussion on when it is suitable to buy a vehicle for business purposes to leverage tax benefits.
The significance of ensuring the business can support the deduction for the vehicle.
Example scenarios illustrating the risks of buying a vehicle based solely on the intention of writing it off.
The need for proper legal structuring and insurance when owning a business vehicle.
How the mileage method can be a suitable option for small business owners.
Thoughts on integrating family members' vehicles into business write-offs for tax benefits.
Are you ready to get certified in EVERY strategy I teach? Start your journey with a FREE 15-minute demo.
You don't want to miss this! Secure your tickets for the most significant tax & legal event of the year: Tax and Legal 360
That's right. Don't buy a car for a tax write off. We need to buy a car because it makes sense for our business and then we get the tax write off. Now, there's a lot of information out on the web of how to write off a vehicle. That's great. But there's a lot of misinformation out there getting everyone excited to go buy a car simply for a write off, thinking they're going to get a Tesla for free. But the truth is, for a lot of people, buying that car for the wrong reason can be devastating to their business. And I'm going to walk you through three reasons why buying that vehicle could be a bad idea. Now, I'm a CPA attorney, best selling author, a partner in a law firm, and an accountant for 20 plus years, seeing business owners make decisions like this. And I want you to know there's good reasons and bad reasons, and I'm going to guide you through it. Number one bad reason for buying a vehicle just for the write off is because we think we're going to get this vehicle for free because of some mysterious tax benefit. The reality is we have to have an ongoing trader business that's making money, that the vehicle is used in the business, that we're making enough money to justify the ride off. So if we don't have an ongoing business where we're allowed to write off this vehicle, we're going to get stuck with it and no write off at all. Example number one, let's say you own a restaurant or some sort of brick and mortar business where essentially you're going from home to the business every day. That's great. And the business could be profitable, but you're not going to be able to write off a vehicle. Commuting, that's not going to be a valid write off for buying that vehicle. Another example, let's say you have an online business. You're working out of your basement and your underwear. That's great. You're making great money, but you don't need a car to go anywhere. So buying this vehicle is not going to be a write off either. And third example, you're a brand new real estate investor and you're so excited and you're out working the angles and you're going to buy some real estate and fix it up and flip it. But you haven't bought anything yet. You haven't made any money yet. You're going to go out and buy that expensive car, hoping to ride it off and garner attention for other investors. That's not a write off. That vehicle is going to sit in the driveway with no tax deduction. So the moral of the story is, let's make sure we have a business that can support the deduction for the vehicle and the vehicle makes sense for the business. Now we can start talking about a write off. Number two reason for trying to buy a vehicle just for the write off is it gets us excited to buy more vehicle than we need. We're gonna now go out and buy a more expensive vehicle because we think the write off is gonna pay for it. People, this is not a good idea. This is equivalent to letting the tail wag the dog. We don't wanna go chase a tax write off. That's a bad economical decision. Let's buy a vehicle we can afford. That makes sense. Yes, we want that BMW or the Range Rover, or this cool new car, or the Tesla or whatever it is. But if we can't afford it. A tax deduction doesn't make it more affordable. Example, we have two realtors. Maybe a brand new realtor getting started in the business. Should they rush out and go buy that brand new BMW so they can drive their clients around? Maybe not. Let's start with a forerunner, something a little more moderate, and get our client base going and start making some money before we get the luxury vehicle. Not a good move. We're buying too much of a vehicle based on our type of business. Now, Realtor number two, they've got a successful business. They've been around for 20 years. They've got stable income, as much as a realtor can have when it comes to stable income. Can they afford the Mercedes? Sure, but we're gonna grow into it. Let's not over buy just for a write off that can pay for itself with the business. Number three, the big truck syndrome. I've had so many clients go out and buy this big truck because the write offs are for a 6000 pound vehicle. And you seen it out there, the suv's and the trucks. You're going to get this kick ass write off. It's going to be awesome. But then they get home and they're like, oh, gas is how much a gallon? And I get 12 miles to the gallon. Maybe that wasn't a good idea because they bought a vehicle just to get a bigger write off. But it wasn't the vehicle they needed. It wasn't the vehicle that made sense for ongoing operations. So let's not go out and buy one of these bigger trucks or suv's simply for the write off, let's buy what we need. Now, let's talk about when you should go out there and buy a cool vehicle for your business and get a great tax write off. Think about Turo or an Uber, or being a private driver in an Uber program or Lyft. Now, if I'm going to go out and buy a vehicle that I know is going to generate income, and the vehicle has a direct purpose to the revenue I'm generating, I'm in the money. For example, I have a client right now that's looking at two or three different black suv, black car service, high end service. There's a demand for it. And normally going out and buying a $60,000 or more suv would make no sense at all. But in this situation, it's a perfect strategy because not only can he make money through the Uber or Lyft or private driving, he can also turo it when it's not being used in a driving scenario. Now, you've got multiple ways to make money, and you get to write off the vehicle of your dreams. Next example, the Tesla. A lot of people want to deduct the Tesla. I get it. But if they go out as an individual and buy the Tesla, their income may limit any sort of tax credit. Well, there's a loophole. If you're a business owner and you can use the Tesla in your business now, I can get the full tax credit and my income doesn't matter. This is the beauty of using the tax code along with what the government wants us to do, and that's stimulate the economy. We're bringing both worlds together. We're helping the environment, we're helping the economy, and you're getting the tax write off. Now, finally, let's keep this simple. There's two different ways to write off your vehicle. You can go actual or mileage depending on the use of the vehicle and what your plans are. You're going to make a decision right at the outset, because once you choose a method, you're stuck with that method for the life of the vehicle. Now, you could have two or three different cars in your arsenal, if you will, or in your driveway, and you can use them in different ways. But once you choose a method with a vehicle, you're stuck with it. Now, under the actual method, this is when you get to write off the vehicle through depreciation or the lease payments, fuel, repairs, all those goodies. You're not going to worry about mileage. You're going to write off the actual expenses. So when you choose between buying or leasing. You have to think about how many miles am I going to put on and how am I going to use this vehicle. The general rule of thumb is if I'm going to use it for more than 50% in my business compared to personal use, and I'm going to put on a ton of miles, I just want to own it. Actual, I'm going to buy it with a loan or not, and I'm going to write off all the cost of maintaining that vehicle. With the depreciation, it's wonderful. But if I'm going to be under 50% use and I'm not going to have a lot of miles, leasing could be amazing because I'm going to have a lower lease payment. Remember? Right. You've been out there, you go out and look at vehicles and you're like, that's the lease payment price. I love that. Well, if you put on too many miles, you're screwed. And so you got to look at how much am I going to use this in my business and what are my total miles? Because leasing could get you a higher value or better car with a lower payment. But again, you put on the miles and you're gonna use it a lot in your business. Just go actual own it yourself, and the write offs are gonna be amazing. Now, a few cautionary points. First, when you go out to buy or lease a vehicle, your credit's gonna come into play. That's fine. Number two, don't think that wrapping the vehicle with signage and some cool vinyl lettering is gonna increase the write off. It doesn't. The IR's does not care if you wrap it with signage. It's how you use it that matters. And number three, don't worry about ownership. You don't have to own it in your LLC or your corporation. The IR's again, has said, we just care about how you use it. And the ownership actually on the title doesn't matter. Let's make sure it makes sense in our business. Now, the second method is mileage, and this is oftentimes the perfect fit for a small business owner because we're not going to worry about fuel, repairs, maintenance, depreciation. The mileage deduction for last year in 2023 was 65.5 cents per mile. This year in 2024 is sixty seven cents per mile. Now, let's do an example. Let's say you go out there and you're willing to buy a Prius. Right now they're getting 50 miles to the gallon or more. Pretty cool, right? What's an average gallon of gas, let's say $3.50. Well, if I go with the actual method and I go drive 50 miles, I only get to write off $3.50 plus repairs and maintenance and depreciation. But if I go out and use the mileage method, and I go put 50 miles on my Prius for $3.50, do what the deduction is at. Get to write off $33.50 for driving the same 50 miles where the actual person gets to write off $3.50. I've ran spreadsheets for so many clients that have gone down the hybrid method or the electric method and getting these vehicles that have a higher miles per gallon ratio, because now they're getting a write off of 30, $40 per gallon of gas that they're putting in the vehicle compared to the actual deductions. So it's super powerful. When you get a vehicle where you're putting on a lot of miles to get a lot of miles per gallon, it's amazing. Now, let's do an example under mileage and take that same realtor that's going to put on 20,000 miles this year, driving clients around. Well, the write off is sixty seven cents per mile. So they're going to get a $13,400 write off using the mileage method. Now, if you add to that a vehicle that gets high miles per gallon, like a Prius at 50 miles per gallon, oh, my gosh, they're getting a write off of $33.50 compared to $3.50 of gas they paid for. That's where the mileage strategy really pays off. So the moral of the story is, once you decide that this vehicle makes sense and the vehicle is the right economic decision for you. Now it's deciding how many miles I'm going to put on this car. Should I buy it, should I lease it, what kind of vehicle do I really want? And I'm going to be able to use in my business. And if I'm going to have a lot of miles, I'm going to probably go with the mileage method. If I'm going to put on lower miles and I want that higher value car, I might go leasing. If I'm going to get a heavier vehicle, like an suv or truck, I'm going to go actual because the gas deduction is going to be huge. There's a lot of different variables. But again, the important thing is buying a vehicle that makes sense. Don't go out and buy a vehicle just for a write off. Buy a vehicle because that makes sense for your business. One other side note that's kind of interesting. If you do go the actual method, and this oftentimes works for the vehicles that are 6000 pounds or more, or they're obviously going the actual method, all of those accessories on the vehicle become a write off as well. So if you've got lights or bigger tires or a lift or a tool kit in the back of your truck, for my contractors, what do you think contractors have all these tricked out trucks? Because it's a freaking awesome write off. Now, do they need all those benefits? I don't know. Hopefully they're making enough money to justify it. But that's the moral of the story here. We don't want to over buy something that we can't afford, but if we can afford it could be a kick ass write off. Now that I've shared this with you and you're ready to take action and you're going to make an informed decision, what do you do next? It's now time to think about the liability of having a vehicle in your business. Your number one chance of a lawsuit is driving down the road. Heaven forbid you're texting and driving. You have employees driving your vehicle, family members using your business vehicle. When you're out on the road, we need to make sure you're protected. I have so many videos on the benefit of the limited liability company or LLC or incorporating, we've got to get our legal structure right to support the ownership of this vehicle and the use of it. Are we using the right insurance with this? All of those legal issues are in all sorts of videos of mine on my YouTube channel, on my posts, my podcast. Please couple together the tax benefits with the legal benefits and start learning now about what's next to structure your business properly. All right, now that you're informed and you're in the know, ready to take action, let's think outside the box. How can we really make this payoff? Are we using our family members in our business? Most small business owners have their family as a part of the business and we want to write off their vehicles too. We want to make sure that we're taking write offs for supporting them in our families and in the business. So please check out my videos below on integrating your family into the business. And let's ride off their cars too.