It may not be your real estate agent who is giving you tax advice, but I have heard way to often clients, friends, colleagues mention they were talking to (enter name here) and they said I could deduct my car for taxes. Not necessarily true and not that straight forward.
Yes, the Internal Revenue Code does allow for the deduction of certain auto expense, but they must be qualified expenditures and be supported with adequate records or sufficient supporting evidence. No records….no evidence equals no deduction. I cannot stress this enough.
To often business owners will treat a vehicle as a company asset and claim an auto deduction for the use and maintenance even though the asset is legally titled in the owners’ individual name. Autos are subject to scrutiny by the IRS because they are often used for some personal nonbusiness use. This is true for cell phones, boats, planes, and RVs as well. If an auto is truly a company asset, then transfer it to the company legally and title it in the companies’ name. Its not that hard if you own the vehicle outright. A bit more complicated if the vehicle is secured by a loan. You must have the bank on board with the transfer, which creates a whole new set of hurdles. This is the primary reasons legal transfers are not done. I see this often with rental real estate too. Regardless, I can guarantee that if the auto is titled in your name and you are taking company depreciation deductions for the vehicle (doesn’t apply to sole proprietorships) then the IRS will take issue with that deduction.
That does not mean you can deduct auto expenses in your business. There are methods to do that which the IRS will accept, but those deductions too will need to be supported by adequate contemporaneous records. The easiest way to is to keep a milage log. I know you all just let out a big sigh at the thought of keep in a log. Well if you want the deduction to hold up under IRS prying eyes then keep the log. Today’s technology and phone apps this is not that hard to do. Your phone is already tracking where you go, use it to our benefit. I might also add that it is super rare that a vehicle is 100% business. Most taxpayers do not have multiple vehicles available to them and often take the business vehicle home each night. This type of use will likely include some personal use. The exception is for fleet vehicles that are left in a yard and the employee/owners uses a personal vehicle to commute back and forth to work. Like I said rare.
I decided to write this post due to a recently decided court case denying a Florida couple depreciation deductions for an RV and sailboat. The couple owned a marina and claimed the sailboat was a sales office and the RV was used for office and overnight location for security staff. Upon investigating the interior of both assets, the IRS agent notice that neither contained elements of business use but rather contain several items that were personal to the couple. As side note yes, the IRS will ask to visually inspect property under audit, so if your RV is your office, then it better look like an office and not your college dormitory. The couple also never legally transferred the assets to the marina. The IRS denied the deduction, the Tax Court agree with the IRS and the IRS’s position was affirmed under appeal. Strike 3 your out.
I will leave you with this one simple thought. If you are going to take a deduction for an asset you own personally then keep records and supporting evidence to take tax deductions. If you are uncertain what that means, and most taxpayers are, then consult with your tax advisors to make sure your method will stand up under audit. Now that you got that covered, jump in your RV and head down for to the marina for a nice afternoon sailing on your yacht. No that is not a taxable deduction.
BERushCPA PS 