April 19, 2024 • 32 mins
Do you find yourself puzzled over how to maximize tax deductions on your vehicle expenses? Don't sweat it! This power-packed episode is your go-to guide for understanding the intricacies of tax deductions, particularly for our comrades in the painting industry. We unravel the essentials of record-keeping requirements, the nuances of different deduction methods, and how your business structure can influence these deductions. Not to forget, we spotlight why titling your vehicle to your business entity is a game-changer and the role of an accountable plan when the vehicle doubles up for personal and business use.
Moving on, we dissect the two prime methods of deductions - the standard mileage rate and the actual expenses method. We pour out insights on the pros of the Standard Mileage Rate and the considerations if you're mulling over the Actual Expenses Method, especially when you're a proud owner of a pricy vehicle. We shed light on the concept of accelerated depreciation and the limits on depreciation in year one for vehicles under 6,000 pounds. Plus, get an inside scoop on why buying a vehicle around year-end could be your strategic tax maneuver.
As we round up, we present you with a suite of methods to track your mileage, from old-school logbooks to modern-day apps like Mile IQ. Ensuring you're not tripped up by common mistakes when documenting your expenses is vital, and we've got you covered on this front too. We close with an emphasis on the robust potential of annual tax savings through vehicle deductions. Whether you're a newbie or a seasoned professional in the painting business, this episode equips you to make the most of your vehicle deductions and see considerable savings on your taxes. Buckle up for a journey that promises to be as informative as it is engaging.
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Transcript
Episode Transcript
Available transcripts are automatically generated. Complete accuracy is not guaranteed.
Speaker 1 (00:00):
Welcome to the profitable painter podcast.
The mission of this podcast issimple To help you navigate the
financial and tax aspects ofstarting, running and scaling a
professional painting business,from the brushes and ladders to
the spreadsheets and balancesheets.
We've got you covered.
But before we dive in, a quickword of caution.
While we strive to provideaccurate and up-to-date
financial and tax information,nothing you hear on this podcast
(00:22):
should be considered asfinancial advice specifically
for you or your business.
We're here to share generalknowledge and experiences, not
to replace the tailored adviceyou get from a professional
financial advisor or taxconsultant.
We strongly recommend youseeking individualized advice
before making any significantfinancial decision.
Speaker 2 (00:41):
This is Daniel, the founder of Bookkeeping for
Painters.
Speaker 3 (00:44):
And this is Richard, tax director, with Bookkeeping
for Painters.
Speaker 2 (00:49):
How's it going, Daniel?
Speaker 3 (00:50):
It's going well.
How you doing?
I'm doing good.
Here in Northern Illinois weare finally moving into fall.
We've had kind of like thatsummer warmth sticking around,
which has been so nice, and thenI woke up this morning and it's
like somebody flipped a switchand now it is 50 degrees and
rainy and you know yourquintessential fall weather.
(01:14):
So I had to turn the heat on inmy house for the first time
today.
Really, yeah.
Speaker 2 (01:19):
It was 80 degrees today.
It was beautiful here inNicaragua.
Speaker 3 (01:25):
Yeah, I imagine that you don't have too much of the
autumn thing going on down bythe equator there.
Speaker 2 (01:37):
Yeah, in December it's still warm.
It's like 75, 80 degrees inDecember.
And my kids they're pretty muchNicaraguans at this point, but
for Christmas we went to thislittle Nicaraguan like hotel
place that had like a nice poolarea and so we thought it would
(02:02):
be cool because the kids couldgo and do the pool thing and
play with other kids while uskind of enjoying just you know
some time outside of the houseand it was probably about 75, 80
degrees.
But they were all complainingit was cold.
They're all like shivering andstuff.
(02:22):
I was like completely spoiledby this weather.
It's not cold at all, likeliterally 75, 80 degrees
Fahrenheit right now, andthey're like all like bundling
up, like acting like it's coldoutside.
So that's the problem I have tolive with is the kids acting
like it's cold when it's 75degrees.
Speaker 3 (02:44):
Yeah Well, we all have our cross to bear, Don't we
, Daniel?
And here in the Midwest it's 50degrees outside, People are
putting on shorts.
It's funny how it's relative,you know.
What is not relative is taxes.
Unfortunately, those are veryset in stone and today I thought
(03:06):
maybe we could talk about oneof the best tax deductions out
there, and that has to do withyour vehicle expenses.
So if you're a paintingbusiness owner, you are almost
certainly using at least onevehicle in your business and
that vehicle is going to be oneof the biggest sources of tax
deductions for you.
(03:27):
So we want to make sure thatyou're taking full advantage of
these and you're not leaving anymoney on the table, sort of
speak.
So I thought today we'd talk alittle bit about you know what
qualifies as a business vehiclededuction.
We could talk about the recordkeeping requirements and the
different methods for takingthose deductions, mainly like
(03:48):
standard mileage rate versusactual expenses.
Speaker 2 (03:52):
Yes, super important topic and it's a topic that a
lot of folks don't quite get,partly because, or mostly I
would say mostly because it'scomplicated.
Of course we're talking aboutthe IRS here.
It's complicated, so there'salways all these caveats and
exceptions and all this stuff,but it does help just to
(04:15):
understand how it applies to use.
We're going to try to lay itout so you know in your
situation what's probably thebest route for yourself, but, of
course, always want to seekprofessional advice for your
specific situation.
Speaker 3 (04:32):
Yeah, yeah, this can get a little tricky, especially
when you have business entitiesinvolved.
But basically the IRS or thetax code, rather the IRC Section
162A, talks about businessdeductions that are ordinary and
necessary business expenses.
And if you have a paintingbusiness, then driving your
(04:55):
vehicle to the job site, meetingwith customers, picking up
paint at Sherwin Williams orBenjamin Moore these are all
extremely ordinary and necessaryexpenses and you want to make
sure that you're getting yourfull deduction for things like
gasoline, tires, maintenance andrepairs and even just the value
(05:17):
of your vehicle.
You know you place a beautifulbrand new pickup truck or work
van into service and after fiveto 10 years it's not worth what
it used to be.
So we want to make sure thatwe're getting tax deductions for
that.
How you're going to do this isgoing to depend a lot on your
(05:40):
business structure.
So if you are a sole proprietorand there you don't have a
separate business entity foryour company, then you're going
to take these deductions on your1040 Schedule C.
That is going to be the moststraightforward way of doing it.
If your company is its ownbusiness entity so we're talking
(06:02):
corporation or partnership oran LLC tax as a corporation or S
corp, then we want to.
We can still take thesedeductions, but we want to make
sure that the vehicle isactually titled to the company,
because in this case the companyis its own separate thing and a
(06:24):
company cannot take deductionsfor a asset that doesn't
actually own.
So, especially if you want to dothings like bonus depreciation
and you have an entity, you wantthat vehicle titled in the name
of the entity.
Now, if it's not titled in thename of the entity, it's titled
in your personal name.
(06:44):
There are ways to work aroundthis.
You know, mainly, you're goingto want to use an accountable
plan to reimburse yourself forusing your vehicle, and that is
something you definitely want totalk to your tax professional
about, especially if yourvehicle is being used for
personal and business use.
It can get very, very hairy ontrying to tease out the business
(07:07):
portion and the personalportion and you might leave some
deductions on the table there.
So talk to your tax pro aboutthat.
Speaker 2 (07:17):
Yeah, and I think for most paying businesses between
the startup phase to million andsometimes even more, a lot of
folks are using their, theirpersonal vehicle registered in
their name, to do, you know, gointo sales calls, checking on
production, coordinating.
(07:38):
They're pretty much using theirpersonal vehicles in those
cases.
So they're using, they have abusiness use and they also have
a personal use.
So you're basically saying wewant to make sure we get the tax
deductions from the businessuse portion for the folks that
are using their personalvehicles.
(07:58):
And then, obviously, if you're,if you have a vehicle dedicated
specifically to business andit's usually for the larger
painting businesses, a millionplus at least those obviously
are tax deduct deductible.
But I think a lot of theconfusion is when you're you
have a personal vehicle titledin your personal name but you're
(08:20):
using it for both personal andbusiness.
Speaker 3 (08:23):
Yeah, yeah, and that is super important, that we
separate the business and thepersonal, because only the
business falls under thatsection 162A ordinary and
necessary.
You know, if we are takingbusiness deductions for gasoline
(08:44):
that we burned on a familyvacation or even the portion of
our truck that we use forpersonal things, that could get
us in big trouble if we were tobe examined.
So, yeah, number one rule ifyou've got a mixed use vehicle,
you need to separate outpersonal from business.
(09:05):
The IRS is very keen on that.
They have an IRS term forproperty, or, yeah, property
that can be mixed use.
They call it listed propertyand I'm not quite sure where
listed comes from, but it meansthings that can be used for both
business and personal.
So they're very well aware ofthat.
(09:28):
And then the other thing is youknow, you need to understand,
you know what constitutesbusiness use and what
constitutes personal use.
So driving to the job site,going on sales calls these are
obviously, you know, businessuse.
Something that is not businessuse but feels like it might be,
would be commuting.
So if you have an office spacethat you run your company out of
(09:53):
and you're driving from yourhome to your office, that's
considered a commute and that isnot business deductible.
But once you leave your officeand you start going out into the
field to do your sales calls orto go to the job site, that
would be deductible.
If you have a home office, thenthe minute you leave your house
(10:16):
you're leaving your office togo out into business.
So that's kind of a nicebenefit to a home office.
But keep in mind that you can'thave both.
You have to have either a homeoffice or an outside one.
Speaker 2 (10:28):
You can't have both, and I think that's a key point
for home office.
If you're using an area in yourhome for exclusively and
regularly for business, thenhopefully you do have a home
office set up and that could bejust be a room that's
exclusively in debt andregularly used for the, you know
(10:53):
, for your business, and sobasically that's a cool bonus
Because, like you said, as soonas you leave your home, your
reckon miles for the business,as opposed to not having one.
Then you can only start theclock for your mileage which
we'll talk about here in asecond Once you hit the paint
(11:14):
store or get to the customer'shouse, whatever it is.
Speaker 3 (11:18):
Yeah, and some people have tried to get around this
by saying like, well, you know,this is a personal trip or a
commuting trip, but I'm gonnajump on myself and I'm gonna
make some business calls andthen I'm going to turn this into
a business use andunfortunately that doesn't fly.
That has been ruled against intax court.
So just being on the phoneconducting business does not
(11:40):
turn your trip into a businesstrip.
Well, you know you mentionedthe standard mileage rate and
that sort of thing, so maybe wecould talk about the two.
You know primary ways that wecome up with these business
deductions and that is thestandard mileage rates and
(12:01):
actual expenses.
So standard mileage rate is asimplified method of figuring
out your deduction where you getto deduct 65 and a half cents
for every business mile youdrive.
That 65 and a half cents coverspretty much all of your vehicle
(12:21):
expenses.
So depreciation, gasoline,tires, repairs, insurance it's
all covered by 65 and a halfcents.
The only thing that you couldadd to that would be parking
fees and tolls.
Those could be additional.
The actual expenses is just likethe name suggests.
(12:43):
It is your actual gasoline cost, your actual repairs and
maintenance insurance and theactual depreciation on the
vehicle.
So that is going to be a littlebit more complicated, because
we need to keep records of everytime we buy gas and we need to
know what our vehicle is worthand how to depreciate it.
(13:04):
But sometimes actual expensescan be more valuable not always,
and we'll talk a little bitmore about that later.
But one thing to keep in mindis that if you like the idea of
the standard mileage rate whichin my experience is usually more
beneficial for paintingbusiness owners, but your
(13:28):
mileage may vary Sorry, bad pun.
If you want to use standardmileage rate, you need to do
that in the first year.
Right, we're gonna start offwith standard mileage rate.
Once you start with standardmileage rate, you can switch to
actual expenses.
But once you go actual expensesyou can't go back to standard
(13:52):
mileage rate.
So it's a one-way street.
Speaker 2 (13:56):
Yeah.
So I think the takeaway is,generally speaking, if you have
to choose between the two,probably in most cases it's
going to be the standard mileagerate is what you want to go
with, because you can alwaysswitch to actual expenses later
when it definitely makes sense.
So when in doubt, standardmileage rate, if you're just
(14:19):
starting out, that's probablygoing to be the best solution.
The only time I would think youcan correct me if I'm wrong is
actual expenses actually makesense is when you have a pretty
expensive vehicle.
But most of the time, you knowwe painting contractors,
especially getting started, it'sjust an average cost pickup
(14:42):
truck that they're putting a lotof miles on and so that a lot
of those miles you know thatracks up them against the
standard mileage rate.
So most cases that's going tobe the method you would want to
go for because that's going togive you the best return on your
taxes.
Speaker 3 (14:58):
Yeah, no, I agree.
Generally, if you have avehicle that has like low to
moderate operating costs so it's, you know, not a gas guzzler,
it's moderately priced, so thedepreciation on it is average
You're not spending you know$500 to have the oil changed
(15:19):
every three months like youmight on a, you know, high
performance vehicle yourstandard mileage rate is
probably going to be betterbecause standard mileage rate is
based on an average.
So average fuel costs, averagedepreciation, average repairs If
your vehicle is a little bitless expensive to operate than
(15:39):
average, you're going to dobetter off with the standard
mileage rate.
On the flip side, maybe youhave a very expensive vehicle.
So the analogy or the example Ilike to use is imagine a doctor
who owns his own practice andhe drives a you know Porsche,
(16:00):
911, $200,000 car that gets youknow six miles to the gallon and
he only drives it maybe 20, 30miles a week to his, to his
office and back.
He's going to do very poorly onthe standard mileage rate.
His actual expenses are goingto be very, very high.
(16:20):
That Porsche is going todepreciate like crazy, the
repairs are going to be veryexpensive and he's going to have
very few miles to deduct.
So he's going to want to doactual expenses.
You know that's kind of anextreme example, but you can see
how you know actual versusstandard would play out with a
low-cost vehicle versus ahigh-cost vehicle.
(16:46):
One thing people talk about alot is accelerated depreciation.
So vehicles are one of the mostexpensive things we're going to
buy for our business andsometimes we want to take that
tax deduction as much as we canright up front and there is some
ability to do that withaccelerated depreciation.
(17:09):
That's where, instead ofstretching out the value of that
car over five years, we'regoing to take most of it in year
one.
Now to do that, you do have touse actual expenses.
Standard mileage rate will notwork for accelerated
depreciation.
The other thing we want toconsider is that the IRC section
(17:32):
280F places limits on how muchyou can depreciate in the first
year If you have a vehicle thatweighs less than 6,000 pounds
curb weight.
So that's going to be most ofyour sedans.
A lot of half-ton trucks aregoing to fit into this category,
you know, moderate-sized SUVs.
(17:55):
The most you're going to beable to depreciate in year one
is $20,200 for 2023.
That number will go up forinflation each year, but it's
around $20,000.
So if you have a $50,000vehicle and you want to take
$20,000 up front, you can.
You'll stretch the remaining$30,000 over the next four years
(18:18):
.
If your vehicle is a heavyvehicle, so it weighs greater
than 6,000 pounds and that'scurb weight, that's empty like,
say, a large work truck or alarge work van, then that is not
subject to limits and thatcould be fully.
Now let me walk that back.
It could be your depreciationwould be higher In 2023, we have
(18:43):
bonus depreciation.
You could feasibly do up to 80%of the purchase price of that
vehicle.
Next year that's going to dropto 60% and then 40%.
Speaker 2 (18:55):
Yeah, I think this is also a key thing, like folks
often are under the impressionwhich they're right like oh,
maybe I can make a purchase of avehicle before the end of the
year for tax purposes, you know.
So buy a new vehicle for thebusiness and reduce my tax
(19:16):
liability and this is trueassuming it's going to be used
in the business and you put itinto use for the end of the year
.
The thing to keep in mind isdoes it make sense for your
situation?
Because you're taking a lot ofthe deductions right away.
(19:38):
So if you're the next year yourbusiness grows, there's not
much deductions left for thatvehicle because you took a lot
of it up front or in that year.
So if your plans are to grow orscale quickly, that may or may
not make sense, depending on thesituation, what you're trying
(19:59):
to accomplish from a taxperspective.
So that's just something toconsider.
Yes, you can buy a vehicle andput it into use in the business
and get a big deduction if yougo with the actual expense
method.
But that may or may not be theright move from a tax planning
perspective.
Speaker 3 (20:18):
Yeah.
And then one other thing I wantto throw out there is if you do
take your depreciation upfront,then you need to consider about
how you're going to dispose ofthe vehicle later on, because
depreciation is saying thatwe're basically going to drive
the wheels off this vehicle andit's going to be worth nothing
(20:41):
when we get done with it.
So if we sell that vehicle orwe trade it in or we take it out
of the business for our ownpersonal use, we need to account
for that value.
So, for example, $50,000vehicle, we've accelerated
(21:02):
depreciation and we'vedepreciated it by $40,000.
Now we sell it for $20,000.
Well, we've got $10,000 ofdepreciation that we took a tax
deduction for, but we didn'tactually use up that vehicle.
(21:22):
We would have to recapture thatand that means adding $10,000
of income to our tax return.
So if you plan on trading inyour car or truck every two to
three years or you think you'regoing to take this vehicle out
of the business relatively soon,you're probably not going to
(21:45):
want to accelerate depreciationbecause you'll end up in a
situation where you'll have torecapture it later on, or in
other words repay it later on.
Yes, yes, repay it later on?
Yeah.
So you know, definitelysomething to talk to your tax
professional about.
I, as you can tell, I can getreally into the weeds on this
(22:09):
sort of thing and runningprojections trying to figure out
, you know, do I want my taxdeduction upfront?
Is it better to save it forlater years, when my tax bracket
is higher?
How will I dispose of thevehicle?
Lots of things to take intoconsideration when it comes to
actual expenses.
So another reason why I thinkstandard mileage rate is best
(22:32):
for folks who have, you know,relatively simple businesses and
lower cost vehicles.
But whether you're doingmileage rate or actual expenses,
the one thing you're not goingto be able to get around is the
record keeping and documentation.
So this is the IRS we'retalking about.
Everything has to be recorded,and that includes the miles that
(22:57):
we drive.
So we need to keep some kind ofa mileage log to show, one, how
many miles we drove in totaland, two, how many of those
miles were for business and howmany were for personal.
Speaker 2 (23:13):
So, unless you Sorry, I was going to say one thing
real quick.
A lot of folks asked, like whatdo I actually need to keep in
terms of records?
Do I need to just keep everysingle receipt?
Is that the?
You know, what do I need to beprepared for?
There are a few things that theIRS really pays attention to
(23:34):
that you really do need to haveput in place.
Like to use an example, ifyou're, if you're buying things
from Sherwin Williams, you don'tneed to worry about saving the
receipts from Sherwin WilliamsOne because they have a portal
that has all that information inthere and then, if you're doing
the bookkeeping properly on,that is pulled into your
(23:54):
bookkeeping software.
So not too concerned aboutreceipts for that.
But like vehicles and meals andstuff like that, those are
scrutinized more closely Becauseof the the component of it you
know for for vehiclesspecifically has that personal
component can be used forpersonal purposes.
(24:14):
So you got to pay attention tothe record keeping part for
vehicles because that's going tobe top on the list when you get
audited that they're going toinvestigate.
Speaker 3 (24:25):
Yeah, yeah, especially the personal versus
the business.
So you know, when you go tofile your taxes, they're going
to want to know how many milesthat vehicle was driven in total
.
How many of those miles werefor business, how many were for
commuting.
So, unless your business,unless your vehicle is, you know
, 100% used for business andthere is absolutely no personal
(24:46):
use, like, let's say, thevehicle is not suitable for
personal use.
We're talking vehicles, likeyou know, work fans that have no
backseat, or you know, flatbedtrucks or things like that.
You have to keep some kind of amileage log so as you can show
the personal versus the business.
Now, I know record keeping is apain in the neck and we want to
(25:09):
try and make it as simple aspossible.
If you are doing standardmileage rates, then you can keep
track of those miles and notneed to worry about receipts for
gasoline, repairs, insurance,that sort of thing.
If you're doing actual expenses, you're going to have to keep
records of everything, becauseif we want that deduction we
(25:34):
have to have the paperwork toprove it.
One you know ways in which thatyou can track your miles.
There's basically, you know any.
Any record that you find usefulwill work Most people use like
paper logs.
You can buy these neat littlelog books from you know Office,
(25:54):
max or Walmart.
You could jot the numbers downin a notebook if you want.
Or if you want to be a littlehigh tech, there are some apps
that you can use on your cellphone.
Mile IQ is one that a lot ofpeople like, and it can use your
phone's GPS to track your milesfor you and then provide you
(26:14):
with reports.
So that could be a little bitof a time saver there.
Speaker 2 (26:19):
Yeah, yeah, I've done both in the paper logbook is a
lot more time consuming thanusing something like MyLineQ.
So, and painting contractors,painting business owners often,
especially if you're betweenzero and a million, you're
probably doing the sales and theproduction management.
(26:40):
You're probably in the car allthe time.
So I definitely recommendsoftware for this If you're
doing any kind of, unless you'rejust one of those people that,
like we were talking about thisbefore.
I guess, richard, your wifereally likes to do the paper
logbook, which I think she's theexception to.
Not most folks like to do thatkind of thing.
(27:03):
So unless you're really intothat type of thing, mylineq is
probably, or something like thatis gonna probably be your best
bet.
It's because it's gonna saveyou a ton of time.
We were just doing the numberson how much time if you're doing
a few estimates during the dayand some production.
(27:23):
You know if you're doing itpaper logbook style, you know
it's gonna take tens of hoursevery year.
You know we estimate somearound 70 hours a year if you're
actually writing and doing itper the IRS guideline.
So that's probably not theright way to go if you're doing,
unless you're maybe juststarting out.
(27:46):
If you so if you're, you know,doing some any sort of volume,
probably need to get MyLineQ.
If you're doing MyLage and it'sgonna, basically it's a swipe
left or right personal businessand it's gonna be a lot easier
to cut down your time, you know,to you know, by 80%.
(28:11):
So definitely recommend gettingsome sort of automation there
to track your miles.
Speaker 3 (28:18):
Yeah, yeah for sure.
You know there's a few commonmistakes that we wanna avoid
when documenting our expensesand one is, you know,
insufficient information.
So there's this you know kindof famous tax court case Hebron
versus the commissioner whereyou know, mr Hebron was claiming
(28:39):
these vehicle expenses and thetax court actually disallowed
them because he did not haveenough documentation.
So we wanna have a written log.
Written is so key that the IRSwill actually ask you on your
schedule, see, do you haveevidence, yes or no?
(29:00):
And if yes, is it written?
Because it must be written.
For it to be allowed, thatwritten evidence needs to have
the you know amount of milesthat you drove.
You know preferably startingodometer and ending odometer and
I think mile IQ does a good jobof that the date that you
traveled and also your businesspurpose.
(29:22):
And when we say businesspurpose we don't wanna just
write down business trip afterevery log.
That has been done in the pastand it has been disallowed for,
you know, insufficientinformation.
It doesn't have to be aparagraph, but you know Johnson
Project, you know Mr Hooversales call, something like that.
(29:47):
To give a little bit of adistinction as to why you were
driving would be sufficient.
Speaker 2 (29:53):
So you're saying I can't do eyewitness testimony as
evidence of my mileage?
No no you cannot so written.
And when we say written, Ithink that does include like
mile IQ, some sort of app.
It's gonna give you that logyou can download at the end of
(30:15):
the year.
That meets the requirementthere.
Speaker 3 (30:20):
Yes, correct, yes.
So you know all this IRC iswritten back in the 70s and 80s.
In the 21st century, writtendoes apply to, you know, written
in an electronic format.
So typed, written, recorded bymile IQ, those would all work
(30:40):
just fine.
So hopefully, you know, ourconversation today has given you
a little bit of a betterunderstanding of the importance
of vehicle deductions.
You know again, this is I'dlike to emphasize this because
of all the business deductionsyou're gonna take in your
(31:00):
painting business, your vehicleis going to comprise a very
large portion of them.
You know it's probably onlygoing to be, you know, second to
say, like material costs andlabor.
When it comes to expenses, wewanna make sure that you're
getting as much as you can.
You know a business vehiclethat drives, you know, 10 or
(31:25):
20,000 miles a year.
Say you drive 20,000 miles ayear, your tax deduction is
going to be 65 and a half cents,that's $13,000 that you don't
have to pay taxes on If you'rein a relatively low tax bracket
of 24%.
That's $3,144 that stays inyour pocket instead of going to
(31:50):
the IRS.
So and that doesn't even countyour state taxes if you live in
an income tax state.
So definitely worth doing.
Try to make it easier onyourself, if you can by using an
app or, if you prefer, a logbook, there's nothing wrong with
that either.
Just ask my wife and she willtell you.
(32:11):
But we really certainlyappreciate everybody listening
today.
If you have questions orcomments or suggestions for
future episodes, daniel, wherewould be the best place for
people to get ahold of us?
Speaker 2 (32:24):
Yeah, go to Facebook and type in grow your painting
business, and that will pull upa private group you can request
access to and we'd love to hearyour comments, maybe what your
questions are about automobileexpenses, and love to hear any
ideas that you have for futurepodcast episodes.
Speaker 3 (32:45):
Yeah, we certainly appreciate you taking the time
to listen and we will see you onthe next episode.
Welcome to the profitable painter podcast.
The mission of this podcast issimple To help you navigate the
financial and tax aspects ofstarting, running and scaling a
professional painting business,from the brushes and ladders to
the spreadsheets and balancesheets.
We've got you covered.
But before we dive in, a quickword of caution.
While we strive to provideaccurate and up-to-date
financial and tax information,nothing you hear on this podcast
(00:22):
should be considered asfinancial advice specifically
for you or your business.
We're here to share generalknowledge and experiences, not
to replace the tailored adviceyou get from a professional
financial advisor or taxconsultant.
We strongly recommend youseeking individualized advice
before making any significantfinancial decision.
Speaker 2 (00:41):
This is Daniel, the founder of Bookkeeping for
Painters.
Speaker 3 (00:44):
And this is Richard, tax director, with Bookkeeping
for Painters.
Speaker 2 (00:49):
How's it going, Daniel?
Speaker 3 (00:50):
It's going well.
How you doing?
I'm doing good.
Here in Northern Illinois weare finally moving into fall.
We've had kind of like thatsummer warmth sticking around,
which has been so nice, and thenI woke up this morning and it's
like somebody flipped a switchand now it is 50 degrees and
rainy and you know yourquintessential fall weather.
(01:14):
So I had to turn the heat on inmy house for the first time
today.
Really, yeah.
Speaker 2 (01:19):
It was 80 degrees today.
It was beautiful here inNicaragua.
Speaker 3 (01:25):
Yeah, I imagine that you don't have too much of the
autumn thing going on down bythe equator there.
Speaker 2 (01:37):
Yeah, in December it's still warm.
It's like 75, 80 degrees inDecember.
And my kids they're pretty muchNicaraguans at this point, but
for Christmas we went to thislittle Nicaraguan like hotel
place that had like a nice poolarea and so we thought it would
(02:02):
be cool because the kids couldgo and do the pool thing and
play with other kids while uskind of enjoying just you know
some time outside of the houseand it was probably about 75, 80
degrees.
But they were all complainingit was cold.
They're all like shivering andstuff.
(02:22):
I was like completely spoiledby this weather.
It's not cold at all, likeliterally 75, 80 degrees
Fahrenheit right now, andthey're like all like bundling
up, like acting like it's coldoutside.
So that's the problem I have tolive with is the kids acting
like it's cold when it's 75degrees.
Speaker 3 (02:44):
Yeah Well, we all have our cross to bear, Don't we
, Daniel?
And here in the Midwest it's 50degrees outside, People are
putting on shorts.
It's funny how it's relative,you know.
What is not relative is taxes.
Unfortunately, those are veryset in stone and today I thought
(03:06):
maybe we could talk about oneof the best tax deductions out
there, and that has to do withyour vehicle expenses.
So if you're a paintingbusiness owner, you are almost
certainly using at least onevehicle in your business and
that vehicle is going to be oneof the biggest sources of tax
deductions for you.
(03:27):
So we want to make sure thatyou're taking full advantage of
these and you're not leaving anymoney on the table, sort of
speak.
So I thought today we'd talk alittle bit about you know what
qualifies as a business vehiclededuction.
We could talk about the recordkeeping requirements and the
different methods for takingthose deductions, mainly like
(03:48):
standard mileage rate versusactual expenses.
Speaker 2 (03:52):
Yes, super important topic and it's a topic that a
lot of folks don't quite get,partly because, or mostly I
would say mostly because it'scomplicated.
Of course we're talking aboutthe IRS here.
It's complicated, so there'salways all these caveats and
exceptions and all this stuff,but it does help just to
(04:15):
understand how it applies to use.
We're going to try to lay itout so you know in your
situation what's probably thebest route for yourself, but, of
course, always want to seekprofessional advice for your
specific situation.
Speaker 3 (04:32):
Yeah, yeah, this can get a little tricky, especially
when you have business entitiesinvolved.
But basically the IRS or thetax code, rather the IRC Section
162A, talks about businessdeductions that are ordinary and
necessary business expenses.
And if you have a paintingbusiness, then driving your
(04:55):
vehicle to the job site, meetingwith customers, picking up
paint at Sherwin Williams orBenjamin Moore these are all
extremely ordinary and necessaryexpenses and you want to make
sure that you're getting yourfull deduction for things like
gasoline, tires, maintenance andrepairs and even just the value
(05:17):
of your vehicle.
You know you place a beautifulbrand new pickup truck or work
van into service and after fiveto 10 years it's not worth what
it used to be.
So we want to make sure thatwe're getting tax deductions for
that.
How you're going to do this isgoing to depend a lot on your
(05:40):
business structure.
So if you are a sole proprietorand there you don't have a
separate business entity foryour company, then you're going
to take these deductions on your1040 Schedule C.
That is going to be the moststraightforward way of doing it.
If your company is its ownbusiness entity so we're talking
(06:02):
corporation or partnership oran LLC tax as a corporation or S
corp, then we want to.
We can still take thesedeductions, but we want to make
sure that the vehicle isactually titled to the company,
because in this case the companyis its own separate thing and a
(06:24):
company cannot take deductionsfor a asset that doesn't
actually own.
So, especially if you want to dothings like bonus depreciation
and you have an entity, you wantthat vehicle titled in the name
of the entity.
Now, if it's not titled in thename of the entity, it's titled
in your personal name.
(06:44):
There are ways to work aroundthis.
You know, mainly, you're goingto want to use an accountable
plan to reimburse yourself forusing your vehicle, and that is
something you definitely want totalk to your tax professional
about, especially if yourvehicle is being used for
personal and business use.
It can get very, very hairy ontrying to tease out the business
(07:07):
portion and the personalportion and you might leave some
deductions on the table there.
So talk to your tax pro aboutthat.
Speaker 2 (07:17):
Yeah, and I think for most paying businesses between
the startup phase to million andsometimes even more, a lot of
folks are using their, theirpersonal vehicle registered in
their name, to do, you know, gointo sales calls, checking on
production, coordinating.
(07:38):
They're pretty much using theirpersonal vehicles in those
cases.
So they're using, they have abusiness use and they also have
a personal use.
So you're basically saying wewant to make sure we get the tax
deductions from the businessuse portion for the folks that
are using their personalvehicles.
(07:58):
And then, obviously, if you're,if you have a vehicle dedicated
specifically to business andit's usually for the larger
painting businesses, a millionplus at least those obviously
are tax deduct deductible.
But I think a lot of theconfusion is when you're you
have a personal vehicle titledin your personal name but you're
(08:20):
using it for both personal andbusiness.
Speaker 3 (08:23):
Yeah, yeah, and that is super important, that we
separate the business and thepersonal, because only the
business falls under thatsection 162A ordinary and
necessary.
You know, if we are takingbusiness deductions for gasoline
(08:44):
that we burned on a familyvacation or even the portion of
our truck that we use forpersonal things, that could get
us in big trouble if we were tobe examined.
So, yeah, number one rule ifyou've got a mixed use vehicle,
you need to separate outpersonal from business.
(09:05):
The IRS is very keen on that.
They have an IRS term forproperty, or, yeah, property
that can be mixed use.
They call it listed propertyand I'm not quite sure where
listed comes from, but it meansthings that can be used for both
business and personal.
So they're very well aware ofthat.
(09:28):
And then the other thing is youknow, you need to understand,
you know what constitutesbusiness use and what
constitutes personal use.
So driving to the job site,going on sales calls these are
obviously, you know, businessuse.
Something that is not businessuse but feels like it might be,
would be commuting.
So if you have an office spacethat you run your company out of
(09:53):
and you're driving from yourhome to your office, that's
considered a commute and that isnot business deductible.
But once you leave your officeand you start going out into the
field to do your sales calls orto go to the job site, that
would be deductible.
If you have a home office, thenthe minute you leave your house
(10:16):
you're leaving your office togo out into business.
So that's kind of a nicebenefit to a home office.
But keep in mind that you can'thave both.
You have to have either a homeoffice or an outside one.
Speaker 2 (10:28):
You can't have both, and I think that's a key point
for home office.
If you're using an area in yourhome for exclusively and
regularly for business, thenhopefully you do have a home
office set up and that could bejust be a room that's
exclusively in debt andregularly used for the, you know
(10:53):
, for your business, and sobasically that's a cool bonus
Because, like you said, as soonas you leave your home, your
reckon miles for the business,as opposed to not having one.
Then you can only start theclock for your mileage which
we'll talk about here in asecond Once you hit the paint
(11:14):
store or get to the customer'shouse, whatever it is.
Speaker 3 (11:18):
Yeah, and some people have tried to get around this
by saying like, well, you know,this is a personal trip or a
commuting trip, but I'm gonnajump on myself and I'm gonna
make some business calls andthen I'm going to turn this into
a business use andunfortunately that doesn't fly.
That has been ruled against intax court.
So just being on the phoneconducting business does not
(11:40):
turn your trip into a businesstrip.
Well, you know you mentionedthe standard mileage rate and
that sort of thing, so maybe wecould talk about the two.
You know primary ways that wecome up with these business
deductions and that is thestandard mileage rates and
(12:01):
actual expenses.
So standard mileage rate is asimplified method of figuring
out your deduction where you getto deduct 65 and a half cents
for every business mile youdrive.
That 65 and a half cents coverspretty much all of your vehicle
(12:21):
expenses.
So depreciation, gasoline,tires, repairs, insurance it's
all covered by 65 and a halfcents.
The only thing that you couldadd to that would be parking
fees and tolls.
Those could be additional.
The actual expenses is just likethe name suggests.
(12:43):
It is your actual gasoline cost, your actual repairs and
maintenance insurance and theactual depreciation on the
vehicle.
So that is going to be a littlebit more complicated, because
we need to keep records of everytime we buy gas and we need to
know what our vehicle is worthand how to depreciate it.
(13:04):
But sometimes actual expensescan be more valuable not always,
and we'll talk a little bitmore about that later.
But one thing to keep in mindis that if you like the idea of
the standard mileage rate whichin my experience is usually more
beneficial for paintingbusiness owners, but your
(13:28):
mileage may vary Sorry, bad pun.
If you want to use standardmileage rate, you need to do
that in the first year.
Right, we're gonna start offwith standard mileage rate.
Once you start with standardmileage rate, you can switch to
actual expenses.
But once you go actual expensesyou can't go back to standard
(13:52):
mileage rate.
So it's a one-way street.
Speaker 2 (13:56):
Yeah.
So I think the takeaway is,generally speaking, if you have
to choose between the two,probably in most cases it's
going to be the standard mileagerate is what you want to go
with, because you can alwaysswitch to actual expenses later
when it definitely makes sense.
So when in doubt, standardmileage rate, if you're just
(14:19):
starting out, that's probablygoing to be the best solution.
The only time I would think youcan correct me if I'm wrong is
actual expenses actually makesense is when you have a pretty
expensive vehicle.
But most of the time, you knowwe painting contractors,
especially getting started, it'sjust an average cost pickup
(14:42):
truck that they're putting a lotof miles on and so that a lot
of those miles you know thatracks up them against the
standard mileage rate.
So most cases that's going tobe the method you would want to
go for because that's going togive you the best return on your
taxes.
Speaker 3 (14:58):
Yeah, no, I agree.
Generally, if you have avehicle that has like low to
moderate operating costs so it's, you know, not a gas guzzler,
it's moderately priced, so thedepreciation on it is average
You're not spending you know$500 to have the oil changed
(15:19):
every three months like youmight on a, you know, high
performance vehicle yourstandard mileage rate is
probably going to be betterbecause standard mileage rate is
based on an average.
So average fuel costs, averagedepreciation, average repairs If
your vehicle is a little bitless expensive to operate than
(15:39):
average, you're going to dobetter off with the standard
mileage rate.
On the flip side, maybe youhave a very expensive vehicle.
So the analogy or the example Ilike to use is imagine a doctor
who owns his own practice andhe drives a you know Porsche,
(16:00):
911, $200,000 car that gets youknow six miles to the gallon and
he only drives it maybe 20, 30miles a week to his, to his
office and back.
He's going to do very poorly onthe standard mileage rate.
His actual expenses are goingto be very, very high.
(16:20):
That Porsche is going todepreciate like crazy, the
repairs are going to be veryexpensive and he's going to have
very few miles to deduct.
So he's going to want to doactual expenses.
You know that's kind of anextreme example, but you can see
how you know actual versusstandard would play out with a
low-cost vehicle versus ahigh-cost vehicle.
(16:46):
One thing people talk about alot is accelerated depreciation.
So vehicles are one of the mostexpensive things we're going to
buy for our business andsometimes we want to take that
tax deduction as much as we canright up front and there is some
ability to do that withaccelerated depreciation.
(17:09):
That's where, instead ofstretching out the value of that
car over five years, we'regoing to take most of it in year
one.
Now to do that, you do have touse actual expenses.
Standard mileage rate will notwork for accelerated
depreciation.
The other thing we want toconsider is that the IRC section
(17:32):
280F places limits on how muchyou can depreciate in the first
year If you have a vehicle thatweighs less than 6,000 pounds
curb weight.
So that's going to be most ofyour sedans.
A lot of half-ton trucks aregoing to fit into this category,
you know, moderate-sized SUVs.
(17:55):
The most you're going to beable to depreciate in year one
is $20,200 for 2023.
That number will go up forinflation each year, but it's
around $20,000.
So if you have a $50,000vehicle and you want to take
$20,000 up front, you can.
You'll stretch the remaining$30,000 over the next four years
(18:18):
.
If your vehicle is a heavyvehicle, so it weighs greater
than 6,000 pounds and that'scurb weight, that's empty like,
say, a large work truck or alarge work van, then that is not
subject to limits and thatcould be fully.
Now let me walk that back.
It could be your depreciationwould be higher In 2023, we have
(18:43):
bonus depreciation.
You could feasibly do up to 80%of the purchase price of that
vehicle.
Next year that's going to dropto 60% and then 40%.
Speaker 2 (18:55):
Yeah, I think this is also a key thing, like folks
often are under the impressionwhich they're right like oh,
maybe I can make a purchase of avehicle before the end of the
year for tax purposes, you know.
So buy a new vehicle for thebusiness and reduce my tax
(19:16):
liability and this is trueassuming it's going to be used
in the business and you put itinto use for the end of the year
.
The thing to keep in mind isdoes it make sense for your
situation?
Because you're taking a lot ofthe deductions right away.
(19:38):
So if you're the next year yourbusiness grows, there's not
much deductions left for thatvehicle because you took a lot
of it up front or in that year.
So if your plans are to grow orscale quickly, that may or may
not make sense, depending on thesituation, what you're trying
(19:59):
to accomplish from a taxperspective.
So that's just something toconsider.
Yes, you can buy a vehicle andput it into use in the business
and get a big deduction if yougo with the actual expense
method.
But that may or may not be theright move from a tax planning
perspective.
Speaker 3 (20:18):
Yeah.
And then one other thing I wantto throw out there is if you do
take your depreciation upfront,then you need to consider about
how you're going to dispose ofthe vehicle later on, because
depreciation is saying thatwe're basically going to drive
the wheels off this vehicle andit's going to be worth nothing
(20:41):
when we get done with it.
So if we sell that vehicle orwe trade it in or we take it out
of the business for our ownpersonal use, we need to account
for that value.
So, for example, $50,000vehicle, we've accelerated
(21:02):
depreciation and we'vedepreciated it by $40,000.
Now we sell it for $20,000.
Well, we've got $10,000 ofdepreciation that we took a tax
deduction for, but we didn'tactually use up that vehicle.
(21:22):
We would have to recapture thatand that means adding $10,000
of income to our tax return.
So if you plan on trading inyour car or truck every two to
three years or you think you'regoing to take this vehicle out
of the business relatively soon,you're probably not going to
(21:45):
want to accelerate depreciationbecause you'll end up in a
situation where you'll have torecapture it later on, or in
other words repay it later on.
Yes, yes, repay it later on?
Yeah.
So you know, definitelysomething to talk to your tax
professional about.
I, as you can tell, I can getreally into the weeds on this
(22:09):
sort of thing and runningprojections trying to figure out
, you know, do I want my taxdeduction upfront?
Is it better to save it forlater years, when my tax bracket
is higher?
How will I dispose of thevehicle?
Lots of things to take intoconsideration when it comes to
actual expenses.
So another reason why I thinkstandard mileage rate is best
(22:32):
for folks who have, you know,relatively simple businesses and
lower cost vehicles.
But whether you're doingmileage rate or actual expenses,
the one thing you're not goingto be able to get around is the
record keeping and documentation.
So this is the IRS we'retalking about.
Everything has to be recorded,and that includes the miles that
(22:57):
we drive.
So we need to keep some kind ofa mileage log to show, one, how
many miles we drove in totaland, two, how many of those
miles were for business and howmany were for personal.
Speaker 2 (23:13):
So, unless you Sorry, I was going to say one thing
real quick.
A lot of folks asked, like whatdo I actually need to keep in
terms of records?
Do I need to just keep everysingle receipt?
Is that the?
You know, what do I need to beprepared for?
There are a few things that theIRS really pays attention to
(23:34):
that you really do need to haveput in place.
Like to use an example, ifyou're, if you're buying things
from Sherwin Williams, you don'tneed to worry about saving the
receipts from Sherwin WilliamsOne because they have a portal
that has all that information inthere and then, if you're doing
the bookkeeping properly on,that is pulled into your
(23:54):
bookkeeping software.
So not too concerned aboutreceipts for that.
But like vehicles and meals andstuff like that, those are
scrutinized more closely Becauseof the the component of it you
know for for vehiclesspecifically has that personal
component can be used forpersonal purposes.
(24:14):
So you got to pay attention tothe record keeping part for
vehicles because that's going tobe top on the list when you get
audited that they're going toinvestigate.
Speaker 3 (24:25):
Yeah, yeah, especially the personal versus
the business.
So you know, when you go tofile your taxes, they're going
to want to know how many milesthat vehicle was driven in total
.
How many of those miles werefor business, how many were for
commuting.
So, unless your business,unless your vehicle is, you know
, 100% used for business andthere is absolutely no personal
(24:46):
use, like, let's say, thevehicle is not suitable for
personal use.
We're talking vehicles, likeyou know, work fans that have no
backseat, or you know, flatbedtrucks or things like that.
You have to keep some kind of amileage log so as you can show
the personal versus the business.
Now, I know record keeping is apain in the neck and we want to
(25:09):
try and make it as simple aspossible.
If you are doing standardmileage rates, then you can keep
track of those miles and notneed to worry about receipts for
gasoline, repairs, insurance,that sort of thing.
If you're doing actual expenses, you're going to have to keep
records of everything, becauseif we want that deduction we
(25:34):
have to have the paperwork toprove it.
One you know ways in which thatyou can track your miles.
There's basically, you know any.
Any record that you find usefulwill work Most people use like
paper logs.
You can buy these neat littlelog books from you know Office,
(25:54):
max or Walmart.
You could jot the numbers downin a notebook if you want.
Or if you want to be a littlehigh tech, there are some apps
that you can use on your cellphone.
Mile IQ is one that a lot ofpeople like, and it can use your
phone's GPS to track your milesfor you and then provide you
(26:14):
with reports.
So that could be a little bitof a time saver there.
Speaker 2 (26:19):
Yeah, yeah, I've done both in the paper logbook is a
lot more time consuming thanusing something like MyLineQ.
So, and painting contractors,painting business owners often,
especially if you're betweenzero and a million, you're
probably doing the sales and theproduction management.
(26:40):
You're probably in the car allthe time.
So I definitely recommendsoftware for this If you're
doing any kind of, unless you'rejust one of those people that,
like we were talking about thisbefore.
I guess, richard, your wifereally likes to do the paper
logbook, which I think she's theexception to.
Not most folks like to do thatkind of thing.
(27:03):
So unless you're really intothat type of thing, mylineq is
probably, or something like thatis gonna probably be your best
bet.
It's because it's gonna saveyou a ton of time.
We were just doing the numberson how much time if you're doing
a few estimates during the dayand some production.
(27:23):
You know if you're doing itpaper logbook style, you know
it's gonna take tens of hoursevery year.
You know we estimate somearound 70 hours a year if you're
actually writing and doing itper the IRS guideline.
So that's probably not theright way to go if you're doing,
unless you're maybe juststarting out.
(27:46):
If you so if you're, you know,doing some any sort of volume,
probably need to get MyLineQ.
If you're doing MyLage and it'sgonna, basically it's a swipe
left or right personal businessand it's gonna be a lot easier
to cut down your time, you know,to you know, by 80%.
(28:11):
So definitely recommend gettingsome sort of automation there
to track your miles.
Speaker 3 (28:18):
Yeah, yeah for sure.
You know there's a few commonmistakes that we wanna avoid
when documenting our expensesand one is, you know,
insufficient information.
So there's this you know kindof famous tax court case Hebron
versus the commissioner whereyou know, mr Hebron was claiming
(28:39):
these vehicle expenses and thetax court actually disallowed
them because he did not haveenough documentation.
So we wanna have a written log.
Written is so key that the IRSwill actually ask you on your
schedule, see, do you haveevidence, yes or no?
(29:00):
And if yes, is it written?
Because it must be written.
For it to be allowed, thatwritten evidence needs to have
the you know amount of milesthat you drove.
You know preferably startingodometer and ending odometer and
I think mile IQ does a good jobof that the date that you
traveled and also your businesspurpose.
(29:22):
And when we say businesspurpose we don't wanna just
write down business trip afterevery log.
That has been done in the pastand it has been disallowed for,
you know, insufficientinformation.
It doesn't have to be aparagraph, but you know Johnson
Project, you know Mr Hooversales call, something like that.
(29:47):
To give a little bit of adistinction as to why you were
driving would be sufficient.
Speaker 2 (29:53):
So you're saying I can't do eyewitness testimony as
evidence of my mileage?
No no you cannot so written.
And when we say written, Ithink that does include like
mile IQ, some sort of app.
It's gonna give you that logyou can download at the end of
(30:15):
the year.
That meets the requirementthere.
Speaker 3 (30:20):
Yes, correct, yes.
So you know all this IRC iswritten back in the 70s and 80s.
In the 21st century, writtendoes apply to, you know, written
in an electronic format.
So typed, written, recorded bymile IQ, those would all work
(30:40):
just fine.
So hopefully, you know, ourconversation today has given you
a little bit of a betterunderstanding of the importance
of vehicle deductions.
You know again, this is I'dlike to emphasize this because
of all the business deductionsyou're gonna take in your
(31:00):
painting business, your vehicleis going to comprise a very
large portion of them.
You know it's probably onlygoing to be, you know, second to
say, like material costs andlabor.
When it comes to expenses, wewanna make sure that you're
getting as much as you can.
You know a business vehiclethat drives, you know, 10 or
(31:25):
20,000 miles a year.
Say you drive 20,000 miles ayear, your tax deduction is
going to be 65 and a half cents,that's $13,000 that you don't
have to pay taxes on If you'rein a relatively low tax bracket
of 24%.
That's $3,144 that stays inyour pocket instead of going to
(31:50):
the IRS.
So and that doesn't even countyour state taxes if you live in
an income tax state.
So definitely worth doing.
Try to make it easier onyourself, if you can by using an
app or, if you prefer, a logbook, there's nothing wrong with
that either.
Just ask my wife and she willtell you.
(32:11):
But we really certainlyappreciate everybody listening
today.
If you have questions orcomments or suggestions for
future episodes, daniel, wherewould be the best place for
people to get ahold of us?
Speaker 2 (32:24):
Yeah, go to Facebook and type in grow your painting
business, and that will pull upa private group you can request
access to and we'd love to hearyour comments, maybe what your
questions are about automobileexpenses, and love to hear any
ideas that you have for futurepodcast episodes.
Speaker 3 (32:45):
Yeah, we certainly appreciate you taking the time
to listen and we will see you onthe next episode.
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The Nikki Glaser Podcast
Every week comedian and infamous roaster Nikki Glaser provides a fun, fast-paced, and brutally honest look into current pop-culture and her own personal life.