New Course! Learn to correct depreciation errors using Form 3115

If you feel like you spend more time driving than anything else in your business, you may be right. It’s not uncommon for some full-time agents to drive upwards of 33,000 miles per year for business. If the average speed driven is 50 MPH, that’s over 12 hours behind the wheel each week!

So, how do you make the most of all your driving? Do you invest it listening to motivational podcasts or Gary Keller’s The Millionaire Real Estate Agent? Earmark the time for meditative introspection? If yes, good for you! If you’re like most of us, however, clock-conscious and somewhat frazzled – your driving time is probably catchup time: returning calls, scheduling appointments, and following up with agents and clients.

Regardless, of how you use your driving-time, life behind the wheel offers one key benefit (at least we tax-pros think so) – it’s all deductible! In fact, for most realtors, auto expenses are their most significant, tax-cutting deduction.

There are articles on that discuss the relationship between Autos and the Home Office and easy ways to Track Business Driving. In this article, we’ll introduce the options real estate agents have for deducting auto use; the Standard Mileage Rate and Actual Auto Expenses. Then, we’ll flesh out the pros and cons of the standard mileage rate.

Deduction Options: Determining which method to use to deduct your auto mileage; actual cost or the standard mileage rate, is a consequential decision that will impact your taxes and recordkeeping for years to come. The Standard Mileage Rate is the simplest method for deducting auto use and is, therefore, an excellent choice for many agents. For some agents, however, the actual cost method will yield a higher deduction. Which deduction is best for you? The answer depends on quite a few variables. Learn more about deducting actual auto expenses. The remainder of this article will flesh out the pros and cons of the standard mileage rate.

Standard Mileage Rate: Deducting auto use via the Standard Mileage Rate is simple: Track your business miles and deduct an IRS-provided amount for each mile driven. The per-mile rate changes from year-to-year but generally runs between fifty-four and fifty-nine cents per mile ($0.58 for 2019). When completing your return, the IRS will also want to know the total miles you drove each business vehicle during the year as well as miles driven to and from your W2 job or principal place of business (also known as commuting miles).

Pros of Standard Mileage Rate: There are some definite benefits to utilizing standard mileage. Here’s a brief list:

  • It’s Simple: All you need to do is track the miles driven!
  • It’s “Safer:” I placed the term safer in quotes because taking the standard mileage rate does not mean you automatically get the deduction. You must be able to prove the business miles you drove during the year. Substantiating business miles, however, is a lot easier and less risky than proving every dollar spent on the vehicle.
  • It’s a Good Deduction: Most agents with mid-value, fuel-efficient vehicles will find that the standard mileage rate provides a deduction equal to or slightly higher claiming actual expenses.
  • Use the First Year & Switch: If you use the standard mileage rate the 1st year the vehicle is used for business, you can switch between the standard mileage rate and actual expense method in later years if they create a larger deduction.
  • You Can Still Deduct Interest, Taxes, and Tolls: When using the standard mileage rate, you can also deduct the vehicles business-use percentage (business miles divided by total miles) of interest paid on your car loan and property taxes paid for the vehicle. Additionally, tolls and parking costs incurred while using the car for business are also deductible - in addition to the standard mileage rate.

Cons of Standard Mileage Rate:

  • Lower than Actual for Some: Most agents find the standard mileage rate equal to or greater than the actual cost method. Those driving expensive vehicles or vehicles with poor gas mileage, however, may find that the actual cost method yields a higher deduction.
  • Depreciation Included in Actual Mileage Rate: Nearly half of the standard mileage rate for a given year is an allowance for depreciation. You are required to track the business miles each vehicle is driven from year-to-year to calculate the total depreciation claimed over time. The depreciation rate can also change from year to year. For example, in 2017 and 2018, the depreciation rate is twenty-five cents per mile. In 2015 and 2016, it was twenty-four cents per mile.
  • When you sell or trade-in your business vehicle, you will be creating a taxable event by incurring a gain or a loss on the sale. For instance, let’s say you purchased your business vehicle in 2015 for $30,000 and drove it 8,000 miles for business in 2015, 10,000 miles in 2016, 12,000 miles in 2017, and 9,000 miles in 2018. In 2018 you sold it for $17,000. Here’s how you would calculate your taxable gain or deductible loss.
    • 2015: 8,000 business miles * $0.24 = $1,920
    • 2016: 10,000 business miles * $0.24 = $2,400
    • 2017: 12,000 business miles * $0.25 = $3,000
    • 2018: 9,000 business miles * $0.25 = $2,250
    • Total Depreciation:$9,570
    • Vehicle Basis (used to calculate gain or loss):
    • Purchase Price: $30,000
    • Minus Depreciation:-$ 9,570
    • = Basis: $20,430
    • Gain or Loss:
    • Sales Price:$17,000
    • Minus Basis:-$20,430
    • = Gain/(Loss): ($3,430)

Takeaway: Using the standard mileage rate will benefit Real Estate Agents who use moderately priced, fuel-efficient vehicles for business. Agents who are extremely busy or lack the discipline required to track every dollar spent on their auto will also appreciate its simplicity. If, on the other hand, you drive a luxury vehicle or one that gets poor gas mileage, you may find the actual cost method financially advantageous.

Summary and Invite: We hope this article has helped you understand deducting business use of your auto by using the standard mileage rate. If you’d like to learn more about cutting your most significant expense, TAXES, check out our Real Estate Agent Tax Cut Library. The Real Estate Agent Tax Cut Library includes over eight hours of video broken into twenty-nine searchable volumes and covers every possible deduction a Real Estate Agent can take on their tax return. Our Broker Version will help your entire agency cut their taxes! We also invite you to browse our courses.

All courses and articles are for informational purposes only and do not constitute tax advice. Taxes are complicated - do not act on course information without consulting a professional. Always refer to treasury regulation before making any tax decision. Read the full disclaimer.

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