One of the most common questions we get is about deducting vehicle expenses. Because most commercial real estate brokers are independent contractors with 1099 compensation, they get to deduct expenses related to the production of income of that business activity. In other words, they get to deduct business expenses.
The Tax Cuts and Jobs Act of 2017 eliminated the itemized deduction for unreimbursed employee expenses, so every broker who is still W-2 can no longer deduct vehicle expenses.
There are two methods for keeping track of and deducting expenses, “Standard Mileage” and “Actual Expenses.” Most brokers will have greater tax savings from the standard mileage method.
Both methods will require you to keep track of business-related versus personal mileage. For the standard mileage method, you stop there. The number of business miles is multiplied by the standard mileage rate of $0.585 per mile for 2022, and that is your deduction.
For example, 10,000 business miles driven multiplied by $0.585 results in a $5,850 deduction.
The standard mileage rate of $0.585 per mile is made up of a general assumption for the expenses of gas, insurance, maintenance, and depreciation. The benefit of this method is that you don’t also have to keep track of those expenses.
If you choose the actual expense method, you will need to keep track of those expenses. Then, add up all those expenses for the year and multiply it by your business-use percentage, which is the ratio of miles driven for business purposes versus total miles driven for the year. It is rare for a vehicle to have 100% business use.
Let’s compare actual expenses to the standard mileage example above.
Gas was $900. Insurance was $1,200. Maintenance was $200.
Depreciation is likely the largest expense. Take the vehicle’s purchase price, including taxes and fees, and divide that by five.
$30,000 total purchase price divided by five is $6,000.
Therefore, actual expenses total $8,300.
Now you multiply those expenses by the business-use percentage. Let’s say 15,000 total miles were driven and 10,000 were for business. Therefore, the business-use percentage is 66.67%. That translates into deductible actual expenses of $8,300 x 66.67% or $5,533.
This is a fairly typical example, and you can see that the deduction was greater using the standard mileage method. However, if you have a very high business-use percentage or an expensive vehicle, then it could lead to a more significant deduction using the actual expense method.
We’ll discuss the opportunity for special depreciation using the actual expense method in a future writing.
