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Small business owners, including real estate agents, have two methods available for deducting their auto use: The Standard Mileage Rate and the Actual Cost Method. For real estate agents, the business auto use is often their most substantial deduction – so deciding which method to use is an important, financially consequential decision. In our article, Real Estate Agents, Auto Deduction Options: Standard Mileage Rate, we introduce these methods and share the process for utilizing as well as the pros & cons of the standard mileage rate. We also cover the auto deduction in detail in our Real Estate Agent Tax-Cut Library. In this article, we will discuss the Actual Cost method – the how-to and pro & cons of using this method.
The Actual Cost Method: Utilizing actual cost to deduct auto use is exactly like it sounds – you track and deduct business-related expense incurred by your vehicle(s). As with the standard mileage rate, you must record the miles you drive each vehicle during the year. You are required to track business miles, commuting miles (those driven to and from a W2 job or regular place of business), and the total miles put on the vehicle during the year. You must also record and categorize all expenses incurred for the vehicle.
Actual Vehicle Costs: Below is a list of ordinary auto expenses that must be tracked and categorized:
Business Use Percentage: The deduction allowed for the expenses listed above is based on the percentage of miles you drive for business during the year. For example, if the auto was driven a total of 10,000 miles during a year, and 3,500 of those miles were for business, 35% of the expenses listed above are deductible as auto expenses. Note: When using tax software to prepare your return, be sure to enter total annual costs into the program. If you enter your mileage correctly, the software should calculate the appropriate deduction.
Fully Deductible Auto Expenses: There are a few auto expenses you can deduct in full, regardless of the business-percentage-use of a vehicle because they directly relate to business:
Fines and Penalties Not Deductible: Fines and penalties for a violation of the law are not deductible on a tax return. This includes parking, speeding tickets as well as fines for dead tags or inspection stickers.
Depreciation of Business Vehicle: Depreciation is the most confusing (and beneficial) aspects of deducting actual auto costs. Depreciation is highly complex and made even more complicated by two related deductions: Bonus Depreciation and the 179 Expense (discussed below).
Pros & Cons of Deducting Actual Auto Expenses: Although most agents will find that the Standard Mileage Rate is a more straightforward deduction that yields similar or higher tax savings, there are certain circumstances in which the Actual Cost Method may generate a larger tax deduction (as discussed below).
Pros of Actual Cost Method: The primary benefit of utilizing the Actual Cost Method is straight forward – it can prove a larger deduction for agents who drive expensive vehicles or those that get poor gas mileage.
As mentioned above, the benefits of depreciation come at a cost. Auto depreciation is one of the most complicated areas of taxation. The law limits depreciation on most vehicle models as well as when and how Bonus Depreciation and the 179 Expense can be deducted. Making depreciation even more challenging to share in a book or article is Congress’s proclivity to change the rules that govern it. When this happens, as it regularly does, all previously written articles and books on the subject are made obsolete.
The complexity and rule-change misinformation make depreciation-based return-errors all too common. It is for this reason that I recommend that agents benefiting from actual auto costs hire a tax professional to prepare their returns. If, however, you’re a diehard do-it-yourselfer, this article covers the basics.
Cons of Deduction the Actual Cost Method: There are a few challenges faced by those who deduct the actual cost method. Below is a list of those challenges.
Takeaway: The actual auto cost method may benefit Real Estate Agents who use expensive vehicles or those with poor gas mileage (i.e., they are more costly to operate than the standard mileage rate allows). Agents who are incredibly organized and who possess the discipline required to track every auto expense will benefit most from the deduction. As mentioned in our article on the standard mileage rate, most agents – especially part-time agents - will find that the Actual Cost method is a lower deduction and not worth the time and effort.
Summary and Invite: We hope this article has helped you to understand the actual cost method of deducting business use of your vehicle. 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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