As real estate investors – wholesalers, short-sales experts, rehabbers, landlords – we will use a vehicle in our real estate investing business dealings. Whether it's to check out a property, meet a potential buyer, make a scheduled repair for a tenant or daily while rehabbing a property for profit. Did you know automobile mileage accrued in the course of your investing is tax-deductible?
The 2013 mileage rate was announced by the IRS. The 2013 mileage rate is up a little from the 2012 mileage rates. Using the mileage rate can help on the bottom line for taxes. It really can help if the mileage rate is applied through a company rather than as an individual tax deduction.
Here are the standard mileage rate deductions for 2012 and 2013:
- Business-related 2013 mileage rate is 56.5 cents per mile
- 2012 mileage rate is 55.5 cents per mile
- Medical travel 2013 mileage rate is 24 cents per mile
- 2012 mileage rate is 23 cents per mile
- Moving travel 2013 mileage rate is 24 cents per mile
- 2012 mileage rate is 23 cents per mile
- Charitable service 2013 mileage rate is 14 cents per mile
- 2012 mileage rate is 14 cents per mile
I always get the question, should my company own my car? My answer is probably not. The object is to get the best tax benefits and save the most money. If there is a company car, the company will deduct (depreciate) the car on its taxes and take all of the operation and maintenance expenses off the company taxes.
That’s all good, because the company expenses come off “above the line” and for a small business person that lowers their adjusted gross income. In light of current tax problems, small business owners need all the “above the line” deductions they can get. To get tax benefits out of a car it doesn’t have to be a company car, but you need to keep track of mileage. If you’re not using the mileage rates and deducting your mileage, you had better start if you don’t have a company car.
Company Cars Don’t Get the Standard Mileage Rate
If the company is taking all of the operating expenses for the company car, it can’t also take the standard mileage rate deduction. But as a small business person, you may actually be better off just taking the mileage rate deduction and keeping the car in your name.
There are lots of problems with a “company car.” For example, if the car is fully depreciated by the company, when the company sells the car there is a recapture issue that will cut the tax benefits. There is never a recapture issue when you just take the mileage rate.
As a side thought, the company could do a 1031 exchange of the old company car for a new company car and avoid the recapture. It’s just a thought for those who have company cars.
Company Cars Are Expensive
The taxes on a company car are expensive, often a lot more than a personal car. My son bought a new Honda Pilot for the low $30,000 type expense. He put it in a living revocable trust to take advantage of the living trust control and to avoid probate, etc. His state came back and said that since it wasn’t in his name it was a company car. (Idiots don’t know what a living revocable trust is.)
The business property taxes the first year on the “company car” were over $8,000. That’s almost five times what the property taxes were on the same vehicle owned by an individual. Obviously, my son did some strong education with the DMV to show them the difference between a living revocable trust and a company.
Auto insurance is often a lot more expensive on a company car vs. a private car.
The Company Car Insurance Problem
If you are going to use the car partly for personal use and partly for business use, you are in trouble with the insurance. If you classify the car as a company car, the company auto insurance may not cover you if you are in an accident using the car for personal reasons.
The flip side of the coin is true also. If you have a personal car and a personal insurance policy, the insurance may not cover an accident if you were using the car for business reasons. You’ve got to be careful.
Instruct your employees (and yourself) that if a personal car is being used for company purposes and there is an accident, be careful what you tell the cops and the insurance folks. You can never admit that you were on business. As soon as you say you were going to the post office for the boss, the personal insurance won’t cover anything. But, there isn’t any company insurance to cover that situation either. You’re in TROUBLE!
The Small Business Owner Mileage Rate vs. Company Car
A small business owner can get a lot of mileage off the mileage rate. (Pun intended) You need to keep track of your mileage, and you need to “manufacture” mileage.
Keep a little notebook thing in the car with a pen. Write down the mileage at the first of the trip and the mileage at the end of the trip with a log of what the trip was for. (Post office, bank, see a client, pick up supplies, etc.) Figure the miles traveled for the trip and write it in the margin. Then apply either the 2012 mileage rate or the 2013 mileage rate to figure what you can take off your taxes.
Actually, today there are cell phone apps that will clock the mileage with a GPS, tally the miles and let you enter the reason for the trip. Everything is stored and brought back in summary form when you ask for it. The app will actually apply the 2012 mileage rate or the 2013 mileage rate as appropriate.
The catch is the mileage rate can be taken for the entire trip. All there has to be is one “business stop” on the entire trip and you will get the mileage rate for the full trip.
You don’t get a mileage rate deduction for commuting to and from work. BUT, if you stop and check the company mail box on the way to work and then drop company mail on the way home, the entire round trip home to office and back is subject to the standard mileage rate deduction at the specified rate.
Mileage Rate Revenue Rulings
There are revenue rulings on what mileage certain professions can take off without any questions. Lawyers get like 60 or 80 percent of the miles driven in a year. Real estate agents, doctors, and many other professionals are the subject of rulings on mileage rate amounts. You may want to check and see if there is a ruling for your profession.
Mileage Rates Can Add Up
When all is said and done, you need to figure if your bottom line is better off taking the mileage rate or having a company car. When all the extra expenses, recapture, and the whole picture is on the table, you may better off just taking the mileage rate on your personal car.
Remember that the business mileage rate comes out above the line and lowers your AGI. If you can lower you adjusted gross income, that may drop you into a lower tax bracket, let you fund a Roth IRA, save some of your exemptions, and help out on a dozen more issues.