Questions? Thoughts? Send a Text to The Optometry Money Podcast!
Jackson Pace, CPA, and Kevin Dang, CPA of Refractional CFO join Evon on the podcast again to dive into a common question - can you (or should you) buy a vehicle under your optometry practice for the tax deduction?
They dive into:
- What's required to deduct the cost of a vehicle in the practice
- Basics of how depreciation works
- What happens when you sell or transfer the car out of the practice
- Business use vs. personal use of the vehicle
- Non-tax considerations when you own a car under your practice
- And more!
Have questions on anything discussed or want to have topics or questions featured on the show? Send Evon an email at podcast@optometrywealth.com.
Check out www.optometrywealth.com to get to know more about Evon, his financial planning firm Optometry Wealth Advisors, and how he helps optometrists nationwide. From there, you can schedule a short Intro call to share what's on your mind and learn how Evon helps ODs master their cash flow and debt, build their net worth, and plan purposefully around their money and their practices.
Resources mentioned on this episode:
- Refractional CFO Website
- The Optometry Money Podcast Ep 96: Deep Dive Into Financial Due Diligence When Buying an Optometry Practice with Jackson Pace and Kevin Dang, CPAs
- The Optometry Money Podcast Ep 71: Viewing the Health of Your Practice Through the Eyes of a CFO with Jackson Pace, CPA
- Schedule an Intro Call with Optometry Wealth Advisors
The Optometry Money Podcast is dedicated to helping optometrists make better decisions around their money, careers, and practices. The show is hosted by Evon Mendrin, CFP®, CSLP®, owner of Optometry Wealth Advisors, a financial planning firm just for optometrists nationwide.
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Transcript
Episode Transcript
Available transcripts are automatically generated. Complete accuracy is not guaranteed.
Evon (00:04):
Hey, everybody.
Welcome back to The OptometryMoney Podcast, where we're
helping OD's all over thecountry.
Make better and better decisionsaround their money, their
careers and the practices.
I am your host, Evon Mendrin,Certified Financial Planner(TM)
practitioner, and owner ofOptometry Wealth Advisors an
independent financial planningfirm just for optometrists
(00:25):
nationwide.
And thank you so much forlistening today.
Appreciate your time andattention and on today's episode
I am joined by Jackson Pace andKevin Dang CPAs of Refractional
CFO.
And we dive into a really commonquestion that we hear from OD
practice owners.
And that's, if you're planningto buy a vehicle, should you
purchase it under the name ofthe practice, so that you can
(00:47):
depreciate it and get that taxdeduction.
So how do we handle vehicles inyour business?
We talk about what is requiredfor a business to own a vehicle
and to take a tax deduction forthat.
We talk a lot about actualbusiness use of your vehicle
versus personal use.
we talk about the basics of howdepreciation works.
I should or shouldn't youaccelerate it versus take it
(01:10):
over a standard schedule.
Then we talk about non taxconsiderations for owning a
vehicle that's especially apersonal vehicle in the name of
the business.
So we give you a lot ofinformation to help you talk
with your own tax professionalsand to come to informed educated
decisions on what to do withthis.
reach out to me or Kevin andJackson, if you have any
(01:32):
questions on any of this.
you can check out all theresources we mentioned here in
the show notes, which you'llfind out the, education hub on
my website,www.optometrywealth.com while
you're there, check out all theother articles and resources and
episodes we've done.
And you can also schedule a nocommitment introductory call.
We can talk about what's on yourmind financially.
(01:54):
And how we serve optometrists tonavigate those same decisions
all over the country.
Without further ado.
Here is my conversation withJackson Pace and Kevin Dang.
Welcome back to the OptometryMoney Podcast.
I'm Evon Mendrin, your host, andI am excited to welcome back to
(02:14):
the podcast, Mr.
Jackson Pace and Mr.
Kevin Dang, CPAs at RefractionalCFO.
Thanks for coming back on.
Yeah no, thanks for, thanks forhaving us, Evon.
Always a pleasure to be on thepodcast.
I, I'm excited to talk aboutwhat I feel is a topic that's
commonly asked about.
You, you know, the three of usare, Inside of a lot of the same
(02:37):
online optometry communities andwe see the questions that are
asked.
And a lot of the times I feellike at least over the last six
months or so, I feel like aquestion that's come up
consistently is you have apractice owner, you're planning
to buy a new car and they'rewondering, they're asking the
group, Hey, can I, or should Ibuy this car in the name of the
(02:59):
practice for the purpose ofdepreciating and getting another
tax deduction?
And, you know, I, I've lookedthrough the tax returns of my
clients and it's not uncommonthat we get to the, the practice
tax return and you see, youknow, a Tesla on there, 100
percent business use, you know,see, you kind of start to see
that on tax returns a littlebit.
(03:20):
I'm sure you guys get askedabout this a lot and see that a
lot, maybe with past or currenttax returns.
So I want to dive into thistopic and kind of get down to
the core of it, the actualfacts, the matter to say, can
and should an optometry practiceowner, purchase the vehicle in
the name of the practice and forthe purposes of taking that
(03:41):
depreciation as a tax deduction.
So let's just start with some ofthe basics.
What are the basic requirements?
What's needed for a practice orany business to own a vehicle
and to take that depreciation asa tax deduction?
What are some of the generalrequirements?
Yeah,
Jackson (04:00):
Yeah, I can, I can touch on this one just a little
bit.
So with a vehicle, they'rereally just like any other
qualified business expense.
So sometimes they stand outbecause there's, for whatever
reason, there's usually a lot ofconfusion, maybe around vehicles
and can the practice own them?
how does the practice actuallyexpense a vehicle?
(04:20):
even get questions around, do wehave to wrap our vehicle in
advertisements to be able to dothis?
Or, so, so for whatever reason,we, we come into a lot of,
issues around the clarity of isit a qualified business expense?
And so the first hurdle that wehave to get over is.
That question exactly, like, isit a qualified business expense
(04:40):
in the practice?
so, as you look at yourpractice, you know, especially
maybe you're listening to thispodcast right now and you're
kind of at that crossroad ofneeding a new vehicle and, and,
you know, we're, we're gettingtoward the end of the year,
fourth quarter, and a lot oftimes this is when we start
doing tax planning.
Maybe you're looking at yourfinancial statements and seeing
that you just had a really goodyear and you have a lot of
(05:04):
income, which means, you Yournet income is up, which means
your potential tax liability isup.
And so we hit these crossroadsand it's like, should we now
purchase a vehicle and does itmake sense to do in the
practice?
And so, we answer that question,you know, just kind of think
through the needs of thepractice, you know, obviously if
you're, maybe the optometrist,you own your practice, maybe you
(05:26):
are an independent optometristdoing 1099 work, for multiple
practices.
you know, maybe you have a needwith your staff members.
we've seen some practices fromtime to time, they'll purchase
vehicles for the practice, forthe purposes of being a courier,
which means, they have a fullretail optical, they have
(05:47):
patients that are coming andgoing, and, and one of the
benefits as they provide theirpatients is when their glasses
are done, they're actually goingto have one of their employees,
yeah, think of it like the Uberof the optical world.
one of the employees hops in thevehicle, they take those glasses
from the practice right to thepatient's house.
They help them try it on andlike in my mind, that's like the
(06:08):
coolest experience.
Like I wish I just had glassesthat would show up magically at
my doorstep.
And, but as we think throughthat scenario, I don't think
anybody listening to thispodcast would question, like
that's a business expense.
You know, we're having ouremployees up in the vehicle,
drive it down to the patient.
And so of these scenarios arepretty black and white.
(06:29):
Like in that one, that that'sdefinitely a business expense.
Now, kind of get back into themindset of, we're the owner, we
have the practice, you know,what happens if I have to get in
my vehicle?
It kind of depends now on whatwe're doing with the vehicle.
So, if you're purchasing thisvehicle and you just use it to
take your family on vacations,Go to sports games, run the kids
(06:50):
around, do that type of stuff,it's not really a business
related purpose.
You know, taking your family onvacation, even though it's fun,
maybe you can kind of squeeze aCE conference in there to maybe
get this into the business realmof an expense..
but there's a lot of times thatwe're just using the vehicle for
personal reasons.
And so, for most of ourpractices, most of the doctors
(07:12):
that we work with, what ends uphappening is we, we have a
vehicle.
And part of it's going to beused for business use of it's
going to be used for personaluse.
And so comes into the equation.
Well, how does that work?
And as we get into our taxreturn, and as we actually book
some of these expenses, I mean,QuickBooks, like how do we do
(07:33):
this?
And so, maybe Kevin, do you wantto kind of go into just kind of
the, maybe more of the technicaldetails of how we actually do
this?
Kevin (07:43):
Yeah, yeah.
so let's, let's break, Evon'squestion down to two, two parts,
right?
How, how do we own a vehiclethrough the business and how we
deduct the expense, right?
and sometimes those two thingsdoes not equal to each other.
So let's talk about ownershipfirst.
of time, we get the question,okay, do, do I buy a vehicle
(08:06):
through the business or should Ibuy Well, if it was like a
straight cash deal, so yes, youcan, you can buy it from the
business.
from the business bank account.
However, if you go out and buy acar and most of the time you
would have some financing withthe car, you know, you get a
(08:28):
loan the dealer or from the,from the car saleman.
in that case, you know, maybenot be so practical that car is
going to be under the businessname because most of the time,
you car saleman don't, don'tlike the car with a loan be
under an LLC What happen if youdefault on that loan?
(08:51):
They, they can't really kind of,get recoup all of that, right?
They, they can, they can recoupthe car, but by the time they,
they sell out the car, they mayget paid less than the amount of
the loan that you have on theLLC So in that case, most of the
time you have to buy the carunder your name, right?
In the real world, that's whatpeople do.
(09:13):
So in that case, it's reallyhard to own the car under the
business if you have a car loan.
Well what we do is we say, hey,you're buying that car with the
loan, you contribute the carwith along with the loan to the
company.
So the bookkeeper may record thecar and they also recognize the
loan.
or if it's just a straight cashdeal, that would be really
(09:36):
simple, right?
The cash is from the bankaccount and we recorded the car
in the balance sheet.
now we already talked about theownership, right?
Between either buying from thebusiness or buying from under
your own name and thencontribute it to the business,
(09:57):
well, but ownership doesn’t meanthat you can get to deduct the
expense or depreciate the wholecar.
Right, you may record a car of$100,000, you know, on the
books, but the next question isthe use of the car.
And the use of the car is whatgets you the deduction.
(10:18):
We have to look into the fact,the IRS would ask, what is the
percentage that you are usingthat car for the personal
purposes versus the businesspurposes, right?
And we have to look at fact andcircumstances.
In the example that Jackson has,if somebody has a car that
solely used for the business andthat is 100 percent of the
(10:39):
business, then we can, know,depreciate the whole car, right?
Obviously, there are, therewould be limited, limitation on
the amount of depreciation eachyear that you can take.
You may have to spread it overthe year because of the
limitation.
but if your business, you onlyuse the car, let's say, for six
(11:00):
months, 70 percent the time, youknow, that for the business and
30 percent of time you use forpersonal purposes, then you can
only be depreciation.
You know, you can only takedepreciation on 70 percent of
the cost basis of the car of100, 000, right?
and, and so, so that, know, andthen in the, in the daily use,
(11:24):
you have to think about what,all the expense for the personal
use and what are the expense forthe business use just like any
other business expense versusthe personal expenses that we
have.
I hope, you know, that answerthe question on how we record
and deduct depreciation
Evon (11:43):
that's a great point on the financing issue.
At a minimum, it may very welljust make it more expensive to
get financing if you need tothrough the business rather than
individually.
But, if, if you're unable to getfinancing, perhaps maybe your
business is, is too new,relatively new, then you'd have
to do sort of this workaround.
(12:03):
Buying it individually and thencontributing into the practice
as an asset.
And, and, you know, a lot of itseems to come down to use,
right?
Just like anything else is, areyou using the vehicle for
business use?
Or is it in reality a personalvehicle?
And Right.
(12:25):
a lot of the times, especiallywhen you kind of read a lot of
these questions or a lot of theanswers to these questions, it's
quite clear.
It's not a business vehicle.
And in fact, it's explicitlystated, it's a personal use
vehicle.
So it does come down to businessuse.
And let's talk a little bit moreabout business use.
We, Jackson gave a perfectexample of one I I've actually
(12:46):
not seen before.
of clear, absolute business use.
Really cool, creative way to usethe vehicle in the business.
What are some other ways to usethe vehicle?
You know, for example, isdriving from home to the
practice considered businessuse?
Is it from the practice to thebank?
Like what, what are some of theways that outside of that kind
(13:09):
of creative use would beconsidered business use?
Jackson (13:12):
Yeah, so there's, obviously, you know, the example
that I gave is, I don't know,you call it an extreme example.
Well, in my mind, it's a reallygood example because you know,
it, it just goes to illustrate,the, the need that that practice
can have in getting glasses.
So, that's one use, scenario.
The other one is, you, if you'rea practice.
(13:33):
employees that are using theirvehicle if sometimes that comes
into play like how do we How dowe treat their vehicles?
I mean if we're focused morejust on maybe the owner their
vehicle in and what constitutesYou know a couple things you
know one a lot of times doctorsare on call So a lot of times
they have to have a vehicle tobe able to get back and forth
(13:55):
from the practice the otherthing that we have to consider
in the IRS kind of looks at thisthrough the lens of are you
actually doing the work in yourpractice?
for a lot of, a lot of theclients that I work with, they
have a dedicated office in theirhome.
That's kind of their primaryoffice for the practice.
They don't, they don't have aseparate office inside their,
(14:15):
their building.
I mean, when we look at howprecious real estate is anymore
and how expensive it can be,sometimes it just doesn't make
sense to build out a nice bigoffice that you can do a lot of
the paperwork and theadministrative work and the
practice at your actual retaillocation.
we're a little more wise in theway that we design it.
Maybe we make the optical alittle bit bigger, but usually
what ends up happening is, isnow we have really the back
(14:38):
office of the practice ishappening in your home.
So we have these instances wherewe have to get from more or less
the headquarters of thepractice, which is.
is at your, at your home, it maybe the actual practice location
or maybe we have to stay on aweekend, we're running around
doing errands, we gotta go pickup stuff for the practice.
(15:01):
if you think through thesedifferent types of trips that
you're taking, you have to thinkthrough it, is, is this a
business trip that I'm taking,is this a personal related trip?
the nice thing about this, isthere's lots of apps out there
that help us just make this alittle bit easier because if if
we had to end every day bytaking out a paper and pen and
(15:23):
writing down in a notebook, youknow, I drove my, you know, when
I got into my vehicle in themorning, the odometer was, you
know, a thousand miles and atthe end of the day it was, miles
and You know, the breakdown ofthis 34 miles is such that, you
know, this, this mini was,personal and then this breakdown
was business.
(15:43):
Nobody even want the headache.
And so, we can do is, is throughthe use of some of these
different apps is we can startto track these trips.
And so, it goes back into, youknow, maybe to build on a little
bit with what, Evon was talkingabout on how we actually
depreciate these vehicles in thepractice.
You know, one scenario is thepractice can or less own the
(16:05):
vehicle.
We depreciate that and that'sjust a of expensing the cost of
that vehicle, over time.
The other way is we can keeptrack of the mileage.
So in the year 2024, right now,the IRS, they come out and every
year they set a standard mileagerate.
so for this year, every milethat you drive your vehicle, you
(16:27):
can actually reimburse yourself67 cents per mile.
So a common question and usuallywhen I, you know, I have people
calling me asking me aboutvehicles, what they're trying to
figure out is How can I coverthe loan payment by, you know,
basically how can the practicecover the loan payment more or
(16:47):
less?
so they're not too worriedabout, is this going to be an
asset of the practice?
Is this going to be a personalpart of it?
They just want to go out.
They want to purchase a vehiclethey just want some help.
They want to be able to pullsome money out of practice be
able to make that payment.
And so sometimes the easier wayto go about this is track your
mileage.
So say maybe over the course ofa month, know, if you drive a
(17:09):
thousand miles.
That's$670 that you get toreimburse yourself for the use
of that, vehicle.
2,000 miles, that's$1,340 thatyou get to reimburse yourself.
the nice thing about thesereimbursements is they come back
to you tax free.
So it's not like the practice isgoing to check for$1,300 and now
(17:31):
you've got to pick that up asincome.
That's a reimbursement for theuse of that personal vehicle.
And so, you kind of get the bestof both worlds.
It's an expense on the practiceside, but it's also money into
your personal bank account thatnow we can go and make that loan
payment.
That's kind of the goal they'reoverall trying to achieve.
(17:51):
With that, anything you want toadd to that, Kevin, as far as
Hopefully I didn't anywhere andgive anybody bad, bad guidance.
Kevin (17:59):
Everything comes down to, to fact and circumstances.
Right.
So let's breaking down what.
know fundamentally, the IRS saywhat is a business expenses, and
it's being defined as ordinaryand necessary, right?
Now, ordinary means somethingIncur, you know, frequently and
(18:20):
answer not out of the norm,right?
If you say it's ordinary, it'sversus non ordinary.
So like, it has to be kind ofreasonable, right?
Making sure that you are not sostepping out of the zone,
stepping out of the norm by somuch, right?
you know, would, would areasonable person think that the
(18:40):
thing that you're doing arereasonable?
necessary mean, is this kind ofnecessary for your business or
it's not necessary, right?
Is this just a, something thatyour business need or is just
something that out of vanitythat you have, you know, or your
hobby that you're doing this?
(19:02):
So, you know, you can becreative if, if, if you have, a,
an office, an ad, you know, withlab or at home and you need to
run back and forth between thepractice and, the room at home
that you use for equipment and,you know, for the edger and, you
know, you know, that would beand necessary, right?
(19:22):
if it, but if it was like a runto, grab a drink with some
friend or going playing golf nowthat would not be ordinary or
necessary for your business.
And so.
just sit down and take a deepbreath and think about the facts
and circumstances, there areways to make it work, it depends
on your needs, so.
Evon (19:42):
Interesting.
And so it seems in terms of therequirements, the business has
to own the vehicle in some way,whether it's purchased by the
practice or contributed into thebusiness.
The, the other part of it iswhat we've been talking about is
business use and somepercentage, some high percentage
of business use and Is there apoint to where the business use
(20:05):
is too low?
For example, if it's droppingunder 50%, like does the
percentage of business useimpact it?
And if so, in what way?
Kevin (20:12):
Right.
you know, let's first talk aboutdepreciation.
That, that two part, if you takethe actual experiment, you can,
if you do depreciation, that'smean you depreciate the car.
And then for any following yearsyou take the actual expenses,
right?
Maintenance, you pay, go out andpay for the gas.
That's the actual method, right?
(20:34):
With the depreciation.
If you take 179.
the business use has to be about50 percent of the time is the
business use, then you take 179.
Now the bonus depreciationdoesn't have that kind of limit,
right?
So no percentage on the businessuse that can take the bonus
depreciation.
(20:54):
Obviously, you can only take thepercentage of the business use
for depreciation, like Imentioned.
if you, you have like 20 percentof the business use for the
current, you of$100,000, thenyou can take the bonus on that
20,000, Portion for the bonus.
Now, 179, it has to be above50%, of the business used for
(21:18):
179.
Now, 179 is still here,strongly, you know, it's still
going on.
Bonus depreciation is phasingout this year 60 percent bonus
depreciation, right?
Let's say.
In my example, let's say the caris 100, 000, you only use 20
(21:38):
percent of the car, right?
you can depreciation 20%, youcan depreciate 20 percent of
that$100,000, which is$20,000,but the first year limit is 60
percent of that.
That means$12,000.
then, if you, you use likeactual expenses, then you have
(21:59):
to think, okay, if I pay for thegas and my gas bill is$100 to
fill up my tank, and I only uselike 30 percent of that on the
drive for the business, then Ideduct 30 percent of that,
right?
Which can get pretty complicatedin real life just to try to
(22:20):
split out all, right.
It's a trick.
So maybe perhaps the easier wayis to use the, the, the mileage,
right?
And with the mileage, then youdon't take the depreciation.
You just say, You track themileage time that by the rate of
70, sorry, of 67 cents a mile inthe year 2024.
(22:40):
And with the, with the mileagetracking, you don't do
depreciation, you don't have tokeep the receipt, right?
So, you know, in, in theory, youhave to do a certain thing, but
in real life, perhaps it'seasier to use the standard
mileage if you co mingle betweenbusiness use and personal use,
right?
Evon (22:59):
That's, that's not as exciting, Kevin.
That's not, it's not a tax savvystrategy you'd see on TikTok.
Kevin (23:07):
Right, right.
Well, you know, in the past, youknow, car use has been always
one of the, forms that likelyincreased your audit risk,
right?
And, you know, Jackson and I,when we give advice to the
client, we normally give adviceof what is, you know, in theory,
(23:31):
what is being required, vs.
what is actually being done.
For example, a lot of client hascommented to us and, You know,
and ask, okay, if I, if I use, Iuse mileage or use car in the
business, that increase the riskof me being audited?
(23:51):
And, and we would give, youknow, list out all the guidances
and they can choose between theactual method versus the
mileage.
And, and so, you know, we, Youknow, here, here's the, some
interesting statistic thathopefully, you know, going to
have to expand the, some of thenext conversation that we're
(24:12):
going to have.
So, since 2011 to 2019, right?
The risk of an S corporation, ifyou have an LLC filing tax as an
S corporation, the audit risk is0.1%, pretty low, right?
Very low.
Yeah.
(24:32):
Right.
Now, if you have, you are a soleproprietor and you file tax as a
Schedule C, right?
If you make the income under$100,000, the audit rate is
0.9%.
Still pretty low, but that isnine times more, of a likelihood
(24:53):
of being audited It's, actuallysurprising to me.
That's interesting.
right?
Now, if you make, if you're,you're filing tax as a Schedule
C, and you're making from$100,000 to$200,000, the audit
rate is 2.4%.
So that's 24 times higher thanthe audit rate of an S
(25:14):
corporation, 24 times.
If you're making$200,000 or moreand filing tax as a Schedule C,
your chance of being audited is1.9%.
So that's 19 percent time, youknow, more than, an S
corporation, right?
So, know if you have like a caror taking mileage under the
(25:38):
Schedule C, that will be pretty,know, pretty high risk right?
if you're in an S corporationand take the deduction of the
car and the mileage, mileages,you are less likely to be
audited.
Well, I don't know if because ofcore issue or just because of
the structure, like I said, theS corporation being audited is
(26:01):
so low versus a soleproprietorship filing tax as a
Schedule C, 24 times more of anaudit risk in some case, right?
So, you know, if you were at,you are a sole proprietorship
and filing tax as a Schedule C,I have to watch out and I have
to give more advice and say,hey, Be a lot more careful
(26:23):
taking the car depreciation andthe car expenses and the mileage
versus an S corporation as awhole, right?
And I think, you know, we, we,we talk about, you know, in, in
real life, you know, how peopledoing it and the tax structure
is also affect that, that riskof being audited.
Evon (26:44):
Is fascinating and I think a lot of practice owners would
hear those low percentages andstart to get some ideas, right?
Ultimately, you can put whateveryou want on your tax return.
And until you get called out forit, you don't have to defend it.
But if you do get the letterfrom the IRS, or if you do get a
notice that you're going to havean audit, then you have to
(27:07):
defend it.
And Right.
ultimately, you know, I'm surethere are costs and time and
frustration with going throughan audit.
But even if you are audited, ifit's legitimate, then and
substantiated, then you don'treally have to worry about it.
I mean, I'm not the taxprofessional here.
I'm curious to know yourperspective on that.
But if it comes down to it andit's not substantiated, well
(27:32):
then you have to defend it.
If you are the unlucky one, thenyou have to go through the
responsibility with your taxprofessional or pay a tax
professional to help you throughit and try to defend that.
Have you been through thatexperience?
I mean, what has that been likefor you?
Kevin (27:47):
Yeah.
I mean, being audited by the IRSis not the most, pleasurable
experience.
know it's, it's reallydifficult, to go back to the
record and you have to keepreally good record to prove, to
substantiate those expenses.
and, the requirement of car, youknow, the use of the car is.
(28:11):
for mileage tracking, if you'retracking the mileage, you have
to have the mileage log.
that's why, you know, we, we'vebeen recommending people to keep
track of the mileage.
Now, we, we talk about in theoryand how to defense in the case
of audit.
Then let's switch back and talkin real life, how people do it.
(28:31):
I have seen clients who come tome and say, I don't keep track
of the mileage wealth Log.
I kind of calculate out thenumber of miles I drive a week,
and then kind of times that by52 weeks in the year and get the
mileage.
Right?
Obviously, you are required bythe IRS to keep track of the
(28:54):
log.
But, in practice, that can, beproven to be a challenge for our
client.
Right.
And, we try to think.
Okay, we know that we want, wehave to keep track of the
mileage log in case of an audit,but what is the chance of you
being audited, right?
(29:14):
What is the result and the riskof you being audited, you know?
What is the fine and thepenalty, and increase of tax,
right?
If your estimate is really closeto the actual mileage you’re
driving, you know perhaps thatwon’t be too bad, right?
You know, the IRS may assess yousome additional tax, but that
amount can be small.
(29:35):
Versus, if you take a reallyunreasonable amount of mileage,
really high, then that wouldcreate a higher tax bill, a
higher penalty, and are in abusiness world, so we want to
take a look at things as, youknow, based on what is the risk,
right?
What is the cost and what is therisk versus the benefit?
(29:58):
So I think, for myself, as aprofessional, obviously, We want
to have the client to follow therule as best as they can, but a
lot of time, it been proven tobe a challenge.
Evon (30:14):
Yeah,
Jackson (30:14):
And I might just add, you know, as we think about
this, you know, let's be smartabout it.
If, if you only have one vehicleand you're claiming on your tax
return that that vehicle is 100percent business use, every time
the IRS comes and it looks atthat, they're going to say,
well, what vehicle did you usefor personal use?
(30:35):
then you're, they're going tokind of just catch you with
this.
Well, yeah, nevermind.
I did that wrong, you know?
So, you know, if you're going todo it, not saying that it's bad.
I mean, it's a, it's alegitimate expense that we can
take, but sometimes our, ourvehicle expenses, we work with a
lot of, A lot of our clientshave, you know, rentals and real
estate properties as well.
(30:56):
So the other thing we have toconsider is if you're, you know,
your business portfolio orwhatever you want to call that
extends outside of yourpractice, there could be cases
where maybe you're using yourvehicle for use in the practice,
maybe you have a rentalproperty, so you're using that
vehicle, run around and, youknow, check on the rental
property and, you know, you'vegot to do repairs and
(31:18):
maintenance.
So one vehicle could kind ofextend over multiple different
schedules on your tax return andthat's where usually it's just
easier to do the standardmileage rate.
You can, you can keep track ofthose miles, like you know,
we've said that they have theapps and everything that will
help us keep track of that.
And even if you don't have anapp, I mean, the simplest form
(31:41):
is just pull up a spreadsheet.
It may be Once a week or once amonth, once a quarter, I mean,
at least once a year, go inthere and create your mileage
log and the mileage log doesn'thave to be complicated.
I mean, you're literally justputting dates, you know, why did
you make this trip and how manymiles was it?
So you can keep it prettysimple.
(32:02):
But if you do that one thing andjust at least have a record of
it, you know, then if it doescome under audit and the IRS
does want us to substantiate it,which means they're going to
call us out and say, you know,prove this is a legitimate
business expense or else we'regoing to disallow it.
then at that point we can handthis stuff over to them and.
And the reason why they love togo after vehicles is because,
(32:24):
for an IRS agent, it's just lowhanging fruit.
A lot of times, 90 percent ofthe people, they just aren't
keeping the mileage logs, theyaren't, you know, doing what
they're supposed to be toactually substantiate the
expense, and so, an easy one forthem to come after.
Evon (32:39):
Yeah.
And that definitely makes sense.
Is sometimes it's just, what,what is the common sense answer?
And if you've got one vehicle,it's clearly not a hundred
percent business use.
I mean, it's just kind of my, myown thinking.
I'm again, I'm not the taxprofessional.
And there are other ways, kindof like the mileage, like you
said, the mileage is still a wayto benefit from your business
(32:59):
use.
Of the vehicle without having tojump through some of these
hoops.
And, Kevin, appreciate you, yougoing through some of those,
basics on depreciation.
You talked about two ways tosort of accelerate that
depreciation into a currentyear.
Section 1 79, which has that50%.
minimum, bonus depreciation,which is at 60 percent and
(33:20):
decreases over the next fewyears.
And then just the regulardepreciation schedule, which I
think is five years.
Right.
Kevin (33:27):
Yeah, yes.
it's over five years
Evon (33:29):
And, and how does the size or type of vehicle play into it?
You hear a lot about getting,you know, the G wagon or large
Escalade something, you know,6,000 pounds or more versus
less.
Like how does that play into it?
Kevin (33:41):
Yeah, it depends on the type of car.
the, you know, car depreciationhas own section of rule,
additional rule need to befollowed.
So you know, divide it into,passenger auto, and that is, you
know, the gross weight is under6, 000 pounds, and then, they
(34:04):
also have truck and van, so itweighs 6, 000 pounds or more,
they use the gross weight tokind of divide out the class
between luxury auto and, trucksand vans.
And of that, you know, let's sayif you buy like a luxurious car,
and you want to depreciate, youknow, obviously in, in, for the
(34:26):
math, I assume that this is 100years for the business.
you thought that you can, if youtake like 179, you can write out
like 100, 000 of depreciation,but that's not true.
there aren't so limit on that.
on each year, how, how much youcan take depends on the, gross
weight limit.
(34:47):
So I believe like for the,gross, you know, for the
passenger auto, the first yeardepreciation limit is 20, 400.
And then it's spread out to the,second year, the third year and
all the years after that.
And so, keep that in mind, whenit's time to buy the, the car.
Jackson (35:05):
The other thing to consider too with depreciation
is you are going to purchase avehicle for your practice, and
again, sometimes we, we scarepeople.
I mean, it is a legitimatething.
You can do it, and, and not runinto any issues as long as, and
that's why kevin and I are here.
That's why we createdRefractional CFO is really just,
if we're going to do it, let'sdo it right.
(35:26):
Let's make sure the I's aredotted, the T's are crossed.
And then that way we just don'thave to worry about it like.
just worry that let's just waituntil statute of limitations is
run out.
So we shouldn't have to beworried about it every single
year, if we, if we just do itright to begin with.
but one note on depreciation, isto go back to if you purchase a
vehicle, think about how longyou're going to have it.
(35:48):
If you're just thinking you'regoing to purchase this for
taxable income year so that youcan, you know, write off a whole
bunch of expenses and lower yourtax liability, And then your
thought is you're just going tosell it the next year.
the IRS does is when we takethat, you know, so say in
Kevin's example, we depreciate$50,000 worth of the vehicle in
(36:10):
year one.
then if we go to sell thatvehicle in year two, because
depreciation is considered anordinary operating expense, you
know, in the practice in yeartwo, when we sell that, now we
have to recapture thatdepreciation, which is
essentially kind of like, youknow, like, in the simplest
terms, Like adding$50,000 worthof income to your return in year
(36:31):
two.
So, some people don't realizethat and they, they sell it in
year two and then they're like,well, like, why is my tax bill
so high?
And it's like, well, because youtook this expense in year one,
you had to recapture it in yeartwo and don't get that benefit
plus it's hurting you a
Evon (36:47):
That, this was actually going to be my next question is
what if you need to get thevehicle out of the practice?
You're going to buy a new one.
You want to give it to a, one ofyour kids.
how does that work?
And especially if it's an Scorporation, if you are
distributing it out of thepractice, it's, It's considered
a sale.
Is that correct?
Right.
That's exactly.
So, you know, anytime you, youdistribute it out, of the
(37:10):
practice, you have to distributeit out as the fair market value
of the car, and so that couldcause some problem with the car
being in an S corporation.
it.
And so that depreciationrecapture is something to think
about, right?
You get the benefit of thatdepreciation and you go to sell
it.
You get that depreciationrecaptured up to a certain tax
(37:32):
rate.
You have to pay taxes on that.
Kevin (37:34):
And I mean, in, in your example, it's even worse when
you distribute out the car,right?
Because it's a, a dim sale asthe fair market value, even
though you didn't really, reallyreceive any cash.
You, just take the car out.
Now you pay tax on it.
Evon (37:49):
Yeah.
You, you give it to, or yourcorporation gives it, gives it
to your, your child or however,you know, switch titling,
however that works.
You don't get cash in return,right?
Your kid's not paying you forit, but you have that deemed
sale.
You have that amount in your taxreturn.
For the most part, you might seethe, the sale value lower than
the originally purchased it.
(38:10):
So maybe you're not, Having topay it on the full amounts, if
I'm understanding thatcorrectly, but not exciting,
right?
That's definitely not a surprisethat you want to see at tax time
when you're looking at your taxreturn and seeing what's going
on.
Jackson (38:23):
I would just add to it that, you know, a lot of times
that's why sometimes it willkind of push people into maybe
just tracking their miles anddoing it that way is because A
lot of times, Kevin and I, we'rethinking through, you know,
here's maybe two or threescenarios down the road that
could potentially negativelyimpact you.
And sometimes when they'reworking with the practice owner,
(38:45):
I mean, they're really focusedon this year, which is great.
and so sometimes there is maybethat disconnect, you know, where
we're thinking five years downthe road and they're thinking,
you know, in year one.
And so, that's why it's just,it's good, it's healthy to have
kind of conversations aroundthis.
Our goal is just hopefully toask those, those questions so
that we can understand.
(39:05):
You know, is this a vehicle thatyou're, you know, maybe you've
had your practice for a year,you're hoping to have this
practice the next 30 years and,and let's, we want to get a
vehicle in there.
So that way as you're doing workrelated stuff, you've got the
practice vehicle for it.
You don't have to use yourpersonal vehicle to do that.
And so as we talk through thosescenarios and just get a better
understanding of, because again,everybody's, Situation is unique
(39:28):
and individual to themselves.
And so, you know, as you either,you know, maybe you're one of
our clients, maybe you'reworking with a CPA or you're
working a, a tax professional,make sure that you explain to
them not only the purpose ofbuying the vehicle for, for this
year, but what your plans aredown the road.
And, and that will kind of helpthem better guide you as well.
Evon (39:47):
Yeah, I think that's great.
And the mileage definitely seemslike the simpler option.
You don't have to deal with thatdepreciation recapture.
in terms of it, just sort of ageneral thought in terms of
depreciation, there are waysthat we've talked about to sort
of accelerate much of that intoa current tax year, or you can
sort of take it on the, thestandard, the standard schedule
(40:11):
over a certain amount of years.
Talking about, well, you know,should you accelerate it?
Should you more align thedepreciation with the actual
cashflow, especially if you'reborrowing to, to buy the car?
Do you have any general ways ofthinking about that?
Whether to accelerate, whetherto just take it over a standard,
schedule?
What, what are your thoughts onthat?
Kevin (40:30):
Yeah so you know, most of the time, the tax structure for,
most of the businesses, they areLLC, filing tax as corporation.
So even if they take thedepreciation, it's the reduction
of the income, but that incomeis being passed down to their
personal tax return, right?
And you know, let's, you know,on a regular schedule, you
(40:53):
depreciate the same amount overfive years, right?
on an accelerated schedule, younormally depreciate more at the
beginning and less at the end,right?
So you really have to take alook at what the income, in
current year versus the incomein the future, right?
Let's say I make less of anincome this year and my higher
(41:16):
tax bracket is, you know, 15%.
Maybe I don't want to take thataccelerated depreciation.
If next year my income is, Wayhigher and, you know, in the
future, I may have my highesttax rate is 37 percent for
federal tax, right?
So, I mean, it's, you know, you,you, do you rather to take that
(41:39):
reduction now at the 10 percentrate, 15 percent tax rate
benefit, or you want to takethat deduction in the future
when your tax rate is 37%,right?
The higher the saving in thefuture is, so it's more of a tax
strategy and planning.
You know, like if it's, if it'sa, if you own a, own a practice
(42:00):
and you already have plenty ofdepreciation from equipment,
from, you know, in the currentyear, if you just barely have a
renovation, you already haveplenty of depreciation and now
your tax rate is 10, 15% and youin a good zone.
I don't think you shouldaccelerate.
Right?
maybe save some of thosedepreciation next year when you
don't have any, bonusdepreciation or any 179 from
(42:24):
equipment or build out and takemore of the depreciation the
next year.
it's all about planning and youknow, we as accountant like to,
you know, help our client withthat all the time.
I mean, we, we got thosequestion all the time.
That's why.
The annual tax planning orquarterly tax planning, they are
pretty crucial.
Jackson (42:43):
It just, it can be an issue.
We've got too many expenses inthe practice this year.
And so, you know, fully takeadvantage of, you know, maybe on
your individual return, thestandard deduction, some of
these other things.
You know, might make sense to,let's, let's hold off on some of
these expenses and push thoseinto future years.
And the nice thing is, with theappreciation, in the way that
(43:06):
IRS allows us to do it, is wecan pick and So, you know, they
have their default method, wecan elect to do more of what's
called a straight line method,spread that evenly throughout
the year.
So, yeah, there's definitelyplanning opportunities around
looking at different scenarios.
Evon (43:21):
It sounds like it just comes down to the projections
and planning.
Looking over the next couple ofyears, thinking about how long
you're going to keep it.
And, we're kind of aninteresting time now where we've
got a, a tax law, much of whichis going to sunset over the next
couple of years.
So large parts of this Tax Cutsand Jobs Act, 2026 tax year and
beyond are going to revert backto prior tax laws.
(43:44):
we've got QBI deduction, that'sCurrently present, that may not
be, I don’t know, we don’t know,but is currently set to not be
2026 and beyond.
So, we're kind of in atransition period too, so I
think it makes a lot of sense totalk with your, your
professionals, talk with yourtax professional, project out
the next couple of years and seewhat, What the numbers look
(44:05):
like, knowing that transitionperiod is going to happen, or
you might be in a place whereyou're phasing out of QBI or
some other deduction or credit,and that accelerated
depreciation may help you phaseback into it.
So, it's a great opportunity totalk with your tax professionals
and, and think about more ofthat long term planning, even
outside of just this tax year.
(44:26):
And there are some other nonfinancial considerations to keep
in mind, something that I thinkabout.
number one is liability andinsurance, and I don't even have
all of the answers to this sortof thing to think about.
But if it is a business ownedvehicle and your kids are
driving it, are there liabilityissues if they get in a car
(44:46):
accident?
You know, if you're an olderdoctor, you've got teenagers
that are taking it, are thereliability concerns?
insurance concerns?
If it's owned by the business,it needs to be insured under a
commercial policy.
Talking to a broker before thiscall, those commercial policies
are going g to be more expensivebecause it's assumed that it's
taking more risk under thepolicy.
(45:08):
And you need to make sure thatif your kids are taking it.
You need to make sure you haveall of the drivers as name
drivers.
You don't want to forget any ofthat.
So there's these non taxconsiderations that you want to
keep in mind.
financial costs.
So if you are buying a largevehicle over 6,000 pounds, just
for the tax benefit.
(45:30):
You're going to be buying a moreexpensive vehicle.
It's going to be a cash hog overthe years.
So you're going to be payingmore over time for that.
And it's important to say thisis all for a deduction, meaning
you have to buy the vehicle infull.
You have to pay the full pricefor it.
If you're borrowing, you need topay the interest on that
borrowing just to get adeduction on a certain
(45:51):
percentage of that value.
So you need to make sure thatthis is something that makes
sense for your family, for yourdriving use, for your, for
whatever you're going to beusing that vehicle for.
any other final thoughts on thisvery exciting topic of cars in
the practice and depreciationand all that.
Jackson (46:09):
You know, you got my wheels spinning there a little
bit and that I feel like this isa would be a whole other podcast
topic, but just, you know, whathappens if your kids are also of
driving age are also employeesand working in your practice and
it has implicating.
So, you know, there aredefinitely lots of things to
consider.
You know, we're.
we're at the tail end of, of2024.
(46:30):
You're going into fourthquarter.
you know, if, if, you're findingyourselves, looking at your
financial statements, you know,wondering about these things,
you know, now's the time to havethose conversations with your
CPA.
I don't wait until Yeah.
but to say I'm at the, I'm atthe car dealership and I'm, I'm
wondering, should I.
I buy the car?
Should I not?
I mean, that, that is, that isnot the best time to ask your
(46:53):
CPA if you should be purchasinga vehicle or not.
so so just know we, we've got,you know, three more months, to
kind of work through thesethings.
The other thing too, interestingwith 2024 is it's a, it's an
election year.
So as we look at some of these,you know, tax legislation, it's
going to be sunsetting orexpire, we could be working with
(47:13):
a whole different set of rulesnext year.
So we, we try and operate thebest we can with, with, what we
know.
I mean, we, we have been ininstances where we get into the
next year and they, they madestuff retroactive.
Hopefully that's not the casebecause that's always a
headache, but, But just know,know what we know now, as we get
into the next years, andprobably just because this
(47:36):
podcast kind of lives on theinternet forever, if you're
listening to this in 2025 andthings have changed, just, just
know, reach out yourprofessional.
Kevin (47:46):
Yeah, exactly You know, imagine if you, you know, this,
this, comparison will be kindof, understandable for all the
listener here.
you go to a doctor and ask fordiagnostics you know, each
doctor would give.
You know, perhaps a slightlydifferent version of the
(48:07):
diagnostics or the medicationthat a patient needs to have.
Similarly, I mean, the tax code,the, the U.
S.
tax code is pretty complicated.
each person, situation is alsodifferent and, and that creates
some complexity here.
So, the advice here as a generaladvices, but please talk to,
(48:33):
your own CPA, of when to buy acar, how to structure that, how
to put it into the business,what method of expenses or
depreciation you should take.
it's vary from different,businesses, I mean, just the,
you know, in, in my hand right,right here, I have this,
playbook of, depreciation and onthe topic of depreciation for
(48:57):
clarification of the tax code.
have probably about, you know,500, 600 pages and, and, and
believe it or not, this thing iscalled Quick Finder.
500 page quick finder, shortcutbook, huh?
Yep.
500 pages of depreciation andcode, and that is already quick.
(49:18):
So, you know, from time to time,the depreciation of cars using
can be pretty complicated.
Evon (49:24):
And I, I appreciate both of you coming on and bringing as
tax professionals, the realityof the situation, both in terms
of how to do it appropriately.
But also in terms of the, theactual audit risk, you know,
that, that businesses face, itmay that change over time, sure.
But, but you, you bring thereality to that.
So listen to Jackson and Kevin,go talk with your own tax
(49:46):
professionals and see what isappropriate for your specific
situation.
based on your circumstances.
And, and with that, I appreciateboth of your time.
Where can people find you andfollow you and learn more about
what you're doing?
Jackson (50:00):
Yeah.
I mean, probably the best way.
so our, our website,refractionalcfo.com.
if you ever want to hop on put a15 minute call for us, you know,
with us, or if you have aquestion, you can go there.
There's a big button, you clickon it, it takes it, takes you to
a calendar.
You can schedule a 15 minutecall with us.
and that's probably the easiestway to, talk to
Evon (50:20):
Perfect.
We'll throw all of that in theshow notes as well as past
episodes we've done together.
So I'll add those into the shownotes too.
If you have questions, reach outto Jackson, Kevin, and in the
meantime, we will catch you allon the next episode.
Take care.
Hey, everybody.
Welcome back to The OptometryMoney Podcast, where we're
helping OD's all over thecountry.
Make better and better decisionsaround their money, their
careers and the practices.
I am your host, Evon Mendrin,Certified Financial Planner(TM)
practitioner, and owner ofOptometry Wealth Advisors an
independent financial planningfirm just for optometrists
(00:25):
nationwide.
And thank you so much forlistening today.
Appreciate your time andattention and on today's episode
I am joined by Jackson Pace andKevin Dang CPAs of Refractional
CFO.
And we dive into a really commonquestion that we hear from OD
practice owners.
And that's, if you're planningto buy a vehicle, should you
purchase it under the name ofthe practice, so that you can
(00:47):
depreciate it and get that taxdeduction.
So how do we handle vehicles inyour business?
We talk about what is requiredfor a business to own a vehicle
and to take a tax deduction forthat.
We talk a lot about actualbusiness use of your vehicle
versus personal use.
we talk about the basics of howdepreciation works.
I should or shouldn't youaccelerate it versus take it
(01:10):
over a standard schedule.
Then we talk about non taxconsiderations for owning a
vehicle that's especially apersonal vehicle in the name of
the business.
So we give you a lot ofinformation to help you talk
with your own tax professionalsand to come to informed educated
decisions on what to do withthis.
reach out to me or Kevin andJackson, if you have any
(01:32):
questions on any of this.
you can check out all theresources we mentioned here in
the show notes, which you'llfind out the, education hub on
my website,www.optometrywealth.com while
you're there, check out all theother articles and resources and
episodes we've done.
And you can also schedule a nocommitment introductory call.
We can talk about what's on yourmind financially.
(01:54):
And how we serve optometrists tonavigate those same decisions
all over the country.
Without further ado.
Here is my conversation withJackson Pace and Kevin Dang.
Welcome back to the OptometryMoney Podcast.
I'm Evon Mendrin, your host, andI am excited to welcome back to
(02:14):
the podcast, Mr.
Jackson Pace and Mr.
Kevin Dang, CPAs at RefractionalCFO.
Thanks for coming back on.
Yeah no, thanks for, thanks forhaving us, Evon.
Always a pleasure to be on thepodcast.
I, I'm excited to talk aboutwhat I feel is a topic that's
commonly asked about.
You, you know, the three of usare, Inside of a lot of the same
(02:37):
online optometry communities andwe see the questions that are
asked.
And a lot of the times I feellike at least over the last six
months or so, I feel like aquestion that's come up
consistently is you have apractice owner, you're planning
to buy a new car and they'rewondering, they're asking the
group, Hey, can I, or should Ibuy this car in the name of the
(02:59):
practice for the purpose ofdepreciating and getting another
tax deduction?
And, you know, I, I've lookedthrough the tax returns of my
clients and it's not uncommonthat we get to the, the practice
tax return and you see, youknow, a Tesla on there, 100
percent business use, you know,see, you kind of start to see
that on tax returns a littlebit.
(03:20):
I'm sure you guys get askedabout this a lot and see that a
lot, maybe with past or currenttax returns.
So I want to dive into thistopic and kind of get down to
the core of it, the actualfacts, the matter to say, can
and should an optometry practiceowner, purchase the vehicle in
the name of the practice and forthe purposes of taking that
(03:41):
depreciation as a tax deduction.
So let's just start with some ofthe basics.
What are the basic requirements?
What's needed for a practice orany business to own a vehicle
and to take that depreciation asa tax deduction?
What are some of the generalrequirements?
Yeah,
Jackson (04:00):
Yeah, I can, I can touch on this one just a little
bit.
So with a vehicle, they'rereally just like any other
qualified business expense.
So sometimes they stand outbecause there's, for whatever
reason, there's usually a lot ofconfusion, maybe around vehicles
and can the practice own them?
how does the practice actuallyexpense a vehicle?
(04:20):
even get questions around, do wehave to wrap our vehicle in
advertisements to be able to dothis?
Or, so, so for whatever reason,we, we come into a lot of,
issues around the clarity of isit a qualified business expense?
And so the first hurdle that wehave to get over is.
That question exactly, like, isit a qualified business expense
(04:40):
in the practice?
so, as you look at yourpractice, you know, especially
maybe you're listening to thispodcast right now and you're
kind of at that crossroad ofneeding a new vehicle and, and,
you know, we're, we're gettingtoward the end of the year,
fourth quarter, and a lot oftimes this is when we start
doing tax planning.
Maybe you're looking at yourfinancial statements and seeing
that you just had a really goodyear and you have a lot of
(05:04):
income, which means, you Yournet income is up, which means
your potential tax liability isup.
And so we hit these crossroadsand it's like, should we now
purchase a vehicle and does itmake sense to do in the
practice?
And so, we answer that question,you know, just kind of think
through the needs of thepractice, you know, obviously if
you're, maybe the optometrist,you own your practice, maybe you
(05:26):
are an independent optometristdoing 1099 work, for multiple
practices.
you know, maybe you have a needwith your staff members.
we've seen some practices fromtime to time, they'll purchase
vehicles for the practice, forthe purposes of being a courier,
which means, they have a fullretail optical, they have
(05:47):
patients that are coming andgoing, and, and one of the
benefits as they provide theirpatients is when their glasses
are done, they're actually goingto have one of their employees,
yeah, think of it like the Uberof the optical world.
one of the employees hops in thevehicle, they take those glasses
from the practice right to thepatient's house.
They help them try it on andlike in my mind, that's like the
(06:08):
coolest experience.
Like I wish I just had glassesthat would show up magically at
my doorstep.
And, but as we think throughthat scenario, I don't think
anybody listening to thispodcast would question, like
that's a business expense.
You know, we're having ouremployees up in the vehicle,
drive it down to the patient.
And so of these scenarios arepretty black and white.
(06:29):
Like in that one, that that'sdefinitely a business expense.
Now, kind of get back into themindset of, we're the owner, we
have the practice, you know,what happens if I have to get in
my vehicle?
It kind of depends now on whatwe're doing with the vehicle.
So, if you're purchasing thisvehicle and you just use it to
take your family on vacations,Go to sports games, run the kids
(06:50):
around, do that type of stuff,it's not really a business
related purpose.
You know, taking your family onvacation, even though it's fun,
maybe you can kind of squeeze aCE conference in there to maybe
get this into the business realmof an expense..
but there's a lot of times thatwe're just using the vehicle for
personal reasons.
And so, for most of ourpractices, most of the doctors
(07:12):
that we work with, what ends uphappening is we, we have a
vehicle.
And part of it's going to beused for business use of it's
going to be used for personaluse.
And so comes into the equation.
Well, how does that work?
And as we get into our taxreturn, and as we actually book
some of these expenses, I mean,QuickBooks, like how do we do
(07:33):
this?
And so, maybe Kevin, do you wantto kind of go into just kind of
the, maybe more of the technicaldetails of how we actually do
this?
Kevin (07:43):
Yeah, yeah.
so let's, let's break, Evon'squestion down to two, two parts,
right?
How, how do we own a vehiclethrough the business and how we
deduct the expense, right?
and sometimes those two thingsdoes not equal to each other.
So let's talk about ownershipfirst.
of time, we get the question,okay, do, do I buy a vehicle
(08:06):
through the business or should Ibuy Well, if it was like a
straight cash deal, so yes, youcan, you can buy it from the
business.
from the business bank account.
However, if you go out and buy acar and most of the time you
would have some financing withthe car, you know, you get a
(08:28):
loan the dealer or from the,from the car saleman.
in that case, you know, maybenot be so practical that car is
going to be under the businessname because most of the time,
you car saleman don't, don'tlike the car with a loan be
under an LLC What happen if youdefault on that loan?
(08:51):
They, they can't really kind of,get recoup all of that, right?
They, they can, they can recoupthe car, but by the time they,
they sell out the car, they mayget paid less than the amount of
the loan that you have on theLLC So in that case, most of the
time you have to buy the carunder your name, right?
In the real world, that's whatpeople do.
(09:13):
So in that case, it's reallyhard to own the car under the
business if you have a car loan.
Well what we do is we say, hey,you're buying that car with the
loan, you contribute the carwith along with the loan to the
company.
So the bookkeeper may record thecar and they also recognize the
loan.
or if it's just a straight cashdeal, that would be really
(09:36):
simple, right?
The cash is from the bankaccount and we recorded the car
in the balance sheet.
now we already talked about theownership, right?
Between either buying from thebusiness or buying from under
your own name and thencontribute it to the business,
(09:57):
well, but ownership doesn’t meanthat you can get to deduct the
expense or depreciate the wholecar.
Right, you may record a car of$100,000, you know, on the
books, but the next question isthe use of the car.
And the use of the car is whatgets you the deduction.
(10:18):
We have to look into the fact,the IRS would ask, what is the
percentage that you are usingthat car for the personal
purposes versus the businesspurposes, right?
And we have to look at fact andcircumstances.
In the example that Jackson has,if somebody has a car that
solely used for the business andthat is 100 percent of the
(10:39):
business, then we can, know,depreciate the whole car, right?
Obviously, there are, therewould be limited, limitation on
the amount of depreciation eachyear that you can take.
You may have to spread it overthe year because of the
limitation.
but if your business, you onlyuse the car, let's say, for six
(11:00):
months, 70 percent the time, youknow, that for the business and
30 percent of time you use forpersonal purposes, then you can
only be depreciation.
You know, you can only takedepreciation on 70 percent of
the cost basis of the car of100, 000, right?
and, and so, so that, know, andthen in the, in the daily use,
(11:24):
you have to think about what,all the expense for the personal
use and what are the expense forthe business use just like any
other business expense versusthe personal expenses that we
have.
I hope, you know, that answerthe question on how we record
and deduct depreciation
Evon (11:43):
that's a great point on the financing issue.
At a minimum, it may very welljust make it more expensive to
get financing if you need tothrough the business rather than
individually.
But, if, if you're unable to getfinancing, perhaps maybe your
business is, is too new,relatively new, then you'd have
to do sort of this workaround.
(12:03):
Buying it individually and thencontributing into the practice
as an asset.
And, and, you know, a lot of itseems to come down to use,
right?
Just like anything else is, areyou using the vehicle for
business use?
Or is it in reality a personalvehicle?
And Right.
(12:25):
a lot of the times, especiallywhen you kind of read a lot of
these questions or a lot of theanswers to these questions, it's
quite clear.
It's not a business vehicle.
And in fact, it's explicitlystated, it's a personal use
vehicle.
So it does come down to businessuse.
And let's talk a little bit moreabout business use.
We, Jackson gave a perfectexample of one I I've actually
(12:46):
not seen before.
of clear, absolute business use.
Really cool, creative way to usethe vehicle in the business.
What are some other ways to usethe vehicle?
You know, for example, isdriving from home to the
practice considered businessuse?
Is it from the practice to thebank?
Like what, what are some of theways that outside of that kind
(13:09):
of creative use would beconsidered business use?
Jackson (13:12):
Yeah, so there's, obviously, you know, the example
that I gave is, I don't know,you call it an extreme example.
Well, in my mind, it's a reallygood example because you know,
it, it just goes to illustrate,the, the need that that practice
can have in getting glasses.
So, that's one use, scenario.
The other one is, you, if you'rea practice.
(13:33):
employees that are using theirvehicle if sometimes that comes
into play like how do we How dowe treat their vehicles?
I mean if we're focused morejust on maybe the owner their
vehicle in and what constitutesYou know a couple things you
know one a lot of times doctorsare on call So a lot of times
they have to have a vehicle tobe able to get back and forth
(13:55):
from the practice the otherthing that we have to consider
in the IRS kind of looks at thisthrough the lens of are you
actually doing the work in yourpractice?
for a lot of, a lot of theclients that I work with, they
have a dedicated office in theirhome.
That's kind of their primaryoffice for the practice.
They don't, they don't have aseparate office inside their,
(14:15):
their building.
I mean, when we look at howprecious real estate is anymore
and how expensive it can be,sometimes it just doesn't make
sense to build out a nice bigoffice that you can do a lot of
the paperwork and theadministrative work and the
practice at your actual retaillocation.
we're a little more wise in theway that we design it.
Maybe we make the optical alittle bit bigger, but usually
what ends up happening is, isnow we have really the back
(14:38):
office of the practice ishappening in your home.
So we have these instances wherewe have to get from more or less
the headquarters of thepractice, which is.
is at your, at your home, it maybe the actual practice location
or maybe we have to stay on aweekend, we're running around
doing errands, we gotta go pickup stuff for the practice.
(15:01):
if you think through thesedifferent types of trips that
you're taking, you have to thinkthrough it, is, is this a
business trip that I'm taking,is this a personal related trip?
the nice thing about this, isthere's lots of apps out there
that help us just make this alittle bit easier because if if
we had to end every day bytaking out a paper and pen and
(15:23):
writing down in a notebook, youknow, I drove my, you know, when
I got into my vehicle in themorning, the odometer was, you
know, a thousand miles and atthe end of the day it was, miles
and You know, the breakdown ofthis 34 miles is such that, you
know, this, this mini was,personal and then this breakdown
was business.
(15:43):
Nobody even want the headache.
And so, we can do is, is throughthe use of some of these
different apps is we can startto track these trips.
And so, it goes back into, youknow, maybe to build on a little
bit with what, Evon was talkingabout on how we actually
depreciate these vehicles in thepractice.
You know, one scenario is thepractice can or less own the
(16:05):
vehicle.
We depreciate that and that'sjust a of expensing the cost of
that vehicle, over time.
The other way is we can keeptrack of the mileage.
So in the year 2024, right now,the IRS, they come out and every
year they set a standard mileagerate.
so for this year, every milethat you drive your vehicle, you
(16:27):
can actually reimburse yourself67 cents per mile.
So a common question and usuallywhen I, you know, I have people
calling me asking me aboutvehicles, what they're trying to
figure out is How can I coverthe loan payment by, you know,
basically how can the practicecover the loan payment more or
(16:47):
less?
so they're not too worriedabout, is this going to be an
asset of the practice?
Is this going to be a personalpart of it?
They just want to go out.
They want to purchase a vehiclethey just want some help.
They want to be able to pullsome money out of practice be
able to make that payment.
And so sometimes the easier wayto go about this is track your
mileage.
So say maybe over the course ofa month, know, if you drive a
(17:09):
thousand miles.
That's$670 that you get toreimburse yourself for the use
of that, vehicle.
2,000 miles, that's$1,340 thatyou get to reimburse yourself.
the nice thing about thesereimbursements is they come back
to you tax free.
So it's not like the practice isgoing to check for$1,300 and now
(17:31):
you've got to pick that up asincome.
That's a reimbursement for theuse of that personal vehicle.
And so, you kind of get the bestof both worlds.
It's an expense on the practiceside, but it's also money into
your personal bank account thatnow we can go and make that loan
payment.
That's kind of the goal they'reoverall trying to achieve.
(17:51):
With that, anything you want toadd to that, Kevin, as far as
Hopefully I didn't anywhere andgive anybody bad, bad guidance.
Kevin (17:59):
Everything comes down to, to fact and circumstances.
Right.
So let's breaking down what.
know fundamentally, the IRS saywhat is a business expenses, and
it's being defined as ordinaryand necessary, right?
Now, ordinary means somethingIncur, you know, frequently and
(18:20):
answer not out of the norm,right?
If you say it's ordinary, it'sversus non ordinary.
So like, it has to be kind ofreasonable, right?
Making sure that you are not sostepping out of the zone,
stepping out of the norm by somuch, right?
you know, would, would areasonable person think that the
(18:40):
thing that you're doing arereasonable?
necessary mean, is this kind ofnecessary for your business or
it's not necessary, right?
Is this just a, something thatyour business need or is just
something that out of vanitythat you have, you know, or your
hobby that you're doing this?
(19:02):
So, you know, you can becreative if, if, if you have, a,
an office, an ad, you know, withlab or at home and you need to
run back and forth between thepractice and, the room at home
that you use for equipment and,you know, for the edger and, you
know, you know, that would beand necessary, right?
(19:22):
if it, but if it was like a runto, grab a drink with some
friend or going playing golf nowthat would not be ordinary or
necessary for your business.
And so.
just sit down and take a deepbreath and think about the facts
and circumstances, there areways to make it work, it depends
on your needs, so.
Evon (19:42):
Interesting.
And so it seems in terms of therequirements, the business has
to own the vehicle in some way,whether it's purchased by the
practice or contributed into thebusiness.
The, the other part of it iswhat we've been talking about is
business use and somepercentage, some high percentage
of business use and Is there apoint to where the business use
(20:05):
is too low?
For example, if it's droppingunder 50%, like does the
percentage of business useimpact it?
And if so, in what way?
Kevin (20:12):
Right.
you know, let's first talk aboutdepreciation.
That, that two part, if you takethe actual experiment, you can,
if you do depreciation, that'smean you depreciate the car.
And then for any following yearsyou take the actual expenses,
right?
Maintenance, you pay, go out andpay for the gas.
That's the actual method, right?
(20:34):
With the depreciation.
If you take 179.
the business use has to be about50 percent of the time is the
business use, then you take 179.
Now the bonus depreciationdoesn't have that kind of limit,
right?
So no percentage on the businessuse that can take the bonus
depreciation.
(20:54):
Obviously, you can only take thepercentage of the business use
for depreciation, like Imentioned.
if you, you have like 20 percentof the business use for the
current, you of$100,000, thenyou can take the bonus on that
20,000, Portion for the bonus.
Now, 179, it has to be above50%, of the business used for
(21:18):
179.
Now, 179 is still here,strongly, you know, it's still
going on.
Bonus depreciation is phasingout this year 60 percent bonus
depreciation, right?
Let's say.
In my example, let's say the caris 100, 000, you only use 20
(21:38):
percent of the car, right?
you can depreciation 20%, youcan depreciate 20 percent of
that$100,000, which is$20,000,but the first year limit is 60
percent of that.
That means$12,000.
then, if you, you use likeactual expenses, then you have
(21:59):
to think, okay, if I pay for thegas and my gas bill is$100 to
fill up my tank, and I only uselike 30 percent of that on the
drive for the business, then Ideduct 30 percent of that,
right?
Which can get pretty complicatedin real life just to try to
(22:20):
split out all, right.
It's a trick.
So maybe perhaps the easier wayis to use the, the, the mileage,
right?
And with the mileage, then youdon't take the depreciation.
You just say, You track themileage time that by the rate of
70, sorry, of 67 cents a mile inthe year 2024.
(22:40):
And with the, with the mileagetracking, you don't do
depreciation, you don't have tokeep the receipt, right?
So, you know, in, in theory, youhave to do a certain thing, but
in real life, perhaps it'seasier to use the standard
mileage if you co mingle betweenbusiness use and personal use,
right?
Evon (22:59):
That's, that's not as exciting, Kevin.
That's not, it's not a tax savvystrategy you'd see on TikTok.
Kevin (23:07):
Right, right.
Well, you know, in the past, youknow, car use has been always
one of the, forms that likelyincreased your audit risk,
right?
And, you know, Jackson and I,when we give advice to the
client, we normally give adviceof what is, you know, in theory,
(23:31):
what is being required, vs.
what is actually being done.
For example, a lot of client hascommented to us and, You know,
and ask, okay, if I, if I use, Iuse mileage or use car in the
business, that increase the riskof me being audited?
(23:51):
And, and we would give, youknow, list out all the guidances
and they can choose between theactual method versus the
mileage.
And, and so, you know, we, Youknow, here, here's the, some
interesting statistic thathopefully, you know, going to
have to expand the, some of thenext conversation that we're
(24:12):
going to have.
So, since 2011 to 2019, right?
The risk of an S corporation, ifyou have an LLC filing tax as an
S corporation, the audit risk is0.1%, pretty low, right?
Very low.
Yeah.
(24:32):
Right.
Now, if you have, you are a soleproprietor and you file tax as a
Schedule C, right?
If you make the income under$100,000, the audit rate is
0.9%.
Still pretty low, but that isnine times more, of a likelihood
(24:53):
of being audited It's, actuallysurprising to me.
That's interesting.
right?
Now, if you make, if you're,you're filing tax as a Schedule
C, and you're making from$100,000 to$200,000, the audit
rate is 2.4%.
So that's 24 times higher thanthe audit rate of an S
(25:14):
corporation, 24 times.
If you're making$200,000 or moreand filing tax as a Schedule C,
your chance of being audited is1.9%.
So that's 19 percent time, youknow, more than, an S
corporation, right?
So, know if you have like a caror taking mileage under the
(25:38):
Schedule C, that will be pretty,know, pretty high risk right?
if you're in an S corporationand take the deduction of the
car and the mileage, mileages,you are less likely to be
audited.
Well, I don't know if because ofcore issue or just because of
the structure, like I said, theS corporation being audited is
(26:01):
so low versus a soleproprietorship filing tax as a
Schedule C, 24 times more of anaudit risk in some case, right?
So, you know, if you were at,you are a sole proprietorship
and filing tax as a Schedule C,I have to watch out and I have
to give more advice and say,hey, Be a lot more careful
(26:23):
taking the car depreciation andthe car expenses and the mileage
versus an S corporation as awhole, right?
And I think, you know, we, we,we talk about, you know, in, in
real life, you know, how peopledoing it and the tax structure
is also affect that, that riskof being audited.
Evon (26:44):
Is fascinating and I think a lot of practice owners would
hear those low percentages andstart to get some ideas, right?
Ultimately, you can put whateveryou want on your tax return.
And until you get called out forit, you don't have to defend it.
But if you do get the letterfrom the IRS, or if you do get a
notice that you're going to havean audit, then you have to
(27:07):
defend it.
And Right.
ultimately, you know, I'm surethere are costs and time and
frustration with going throughan audit.
But even if you are audited, ifit's legitimate, then and
substantiated, then you don'treally have to worry about it.
I mean, I'm not the taxprofessional here.
I'm curious to know yourperspective on that.
But if it comes down to it andit's not substantiated, well
(27:32):
then you have to defend it.
If you are the unlucky one, thenyou have to go through the
responsibility with your taxprofessional or pay a tax
professional to help you throughit and try to defend that.
Have you been through thatexperience?
I mean, what has that been likefor you?
Kevin (27:47):
Yeah.
I mean, being audited by the IRSis not the most, pleasurable
experience.
know it's, it's reallydifficult, to go back to the
record and you have to keepreally good record to prove, to
substantiate those expenses.
and, the requirement of car, youknow, the use of the car is.
(28:11):
for mileage tracking, if you'retracking the mileage, you have
to have the mileage log.
that's why, you know, we, we'vebeen recommending people to keep
track of the mileage.
Now, we, we talk about in theoryand how to defense in the case
of audit.
Then let's switch back and talkin real life, how people do it.
(28:31):
I have seen clients who come tome and say, I don't keep track
of the mileage wealth Log.
I kind of calculate out thenumber of miles I drive a week,
and then kind of times that by52 weeks in the year and get the
mileage.
Right?
Obviously, you are required bythe IRS to keep track of the
(28:54):
log.
But, in practice, that can, beproven to be a challenge for our
client.
Right.
And, we try to think.
Okay, we know that we want, wehave to keep track of the
mileage log in case of an audit,but what is the chance of you
being audited, right?
(29:14):
What is the result and the riskof you being audited, you know?
What is the fine and thepenalty, and increase of tax,
right?
If your estimate is really closeto the actual mileage you’re
driving, you know perhaps thatwon’t be too bad, right?
You know, the IRS may assess yousome additional tax, but that
amount can be small.
(29:35):
Versus, if you take a reallyunreasonable amount of mileage,
really high, then that wouldcreate a higher tax bill, a
higher penalty, and are in abusiness world, so we want to
take a look at things as, youknow, based on what is the risk,
right?
What is the cost and what is therisk versus the benefit?
(29:58):
So I think, for myself, as aprofessional, obviously, We want
to have the client to follow therule as best as they can, but a
lot of time, it been proven tobe a challenge.
Evon (30:14):
Yeah,
Jackson (30:14):
And I might just add, you know, as we think about
this, you know, let's be smartabout it.
If, if you only have one vehicleand you're claiming on your tax
return that that vehicle is 100percent business use, every time
the IRS comes and it looks atthat, they're going to say,
well, what vehicle did you usefor personal use?
(30:35):
then you're, they're going tokind of just catch you with
this.
Well, yeah, nevermind.
I did that wrong, you know?
So, you know, if you're going todo it, not saying that it's bad.
I mean, it's a, it's alegitimate expense that we can
take, but sometimes our, ourvehicle expenses, we work with a
lot of, A lot of our clientshave, you know, rentals and real
estate properties as well.
(30:56):
So the other thing we have toconsider is if you're, you know,
your business portfolio orwhatever you want to call that
extends outside of yourpractice, there could be cases
where maybe you're using yourvehicle for use in the practice,
maybe you have a rentalproperty, so you're using that
vehicle, run around and, youknow, check on the rental
property and, you know, you'vegot to do repairs and
(31:18):
maintenance.
So one vehicle could kind ofextend over multiple different
schedules on your tax return andthat's where usually it's just
easier to do the standardmileage rate.
You can, you can keep track ofthose miles, like you know,
we've said that they have theapps and everything that will
help us keep track of that.
And even if you don't have anapp, I mean, the simplest form
(31:41):
is just pull up a spreadsheet.
It may be Once a week or once amonth, once a quarter, I mean,
at least once a year, go inthere and create your mileage
log and the mileage log doesn'thave to be complicated.
I mean, you're literally justputting dates, you know, why did
you make this trip and how manymiles was it?
So you can keep it prettysimple.
(32:02):
But if you do that one thing andjust at least have a record of
it, you know, then if it doescome under audit and the IRS
does want us to substantiate it,which means they're going to
call us out and say, you know,prove this is a legitimate
business expense or else we'regoing to disallow it.
then at that point we can handthis stuff over to them and.
And the reason why they love togo after vehicles is because,
(32:24):
for an IRS agent, it's just lowhanging fruit.
A lot of times, 90 percent ofthe people, they just aren't
keeping the mileage logs, theyaren't, you know, doing what
they're supposed to be toactually substantiate the
expense, and so, an easy one forthem to come after.
Evon (32:39):
Yeah.
And that definitely makes sense.
Is sometimes it's just, what,what is the common sense answer?
And if you've got one vehicle,it's clearly not a hundred
percent business use.
I mean, it's just kind of my, myown thinking.
I'm again, I'm not the taxprofessional.
And there are other ways, kindof like the mileage, like you
said, the mileage is still a wayto benefit from your business
(32:59):
use.
Of the vehicle without having tojump through some of these
hoops.
And, Kevin, appreciate you, yougoing through some of those,
basics on depreciation.
You talked about two ways tosort of accelerate that
depreciation into a currentyear.
Section 1 79, which has that50%.
minimum, bonus depreciation,which is at 60 percent and
(33:20):
decreases over the next fewyears.
And then just the regulardepreciation schedule, which I
think is five years.
Right.
Kevin (33:27):
Yeah, yes.
it's over five years
Evon (33:29):
And, and how does the size or type of vehicle play into it?
You hear a lot about getting,you know, the G wagon or large
Escalade something, you know,6,000 pounds or more versus
less.
Like how does that play into it?
Kevin (33:41):
Yeah, it depends on the type of car.
the, you know, car depreciationhas own section of rule,
additional rule need to befollowed.
So you know, divide it into,passenger auto, and that is, you
know, the gross weight is under6, 000 pounds, and then, they
(34:04):
also have truck and van, so itweighs 6, 000 pounds or more,
they use the gross weight tokind of divide out the class
between luxury auto and, trucksand vans.
And of that, you know, let's sayif you buy like a luxurious car,
and you want to depreciate, youknow, obviously in, in, for the
(34:26):
math, I assume that this is 100years for the business.
you thought that you can, if youtake like 179, you can write out
like 100, 000 of depreciation,but that's not true.
there aren't so limit on that.
on each year, how, how much youcan take depends on the, gross
weight limit.
(34:47):
So I believe like for the,gross, you know, for the
passenger auto, the first yeardepreciation limit is 20, 400.
And then it's spread out to the,second year, the third year and
all the years after that.
And so, keep that in mind, whenit's time to buy the, the car.
Jackson (35:05):
The other thing to consider too with depreciation
is you are going to purchase avehicle for your practice, and
again, sometimes we, we scarepeople.
I mean, it is a legitimatething.
You can do it, and, and not runinto any issues as long as, and
that's why kevin and I are here.
That's why we createdRefractional CFO is really just,
if we're going to do it, let'sdo it right.
(35:26):
Let's make sure the I's aredotted, the T's are crossed.
And then that way we just don'thave to worry about it like.
just worry that let's just waituntil statute of limitations is
run out.
So we shouldn't have to beworried about it every single
year, if we, if we just do itright to begin with.
but one note on depreciation, isto go back to if you purchase a
vehicle, think about how longyou're going to have it.
(35:48):
If you're just thinking you'regoing to purchase this for
taxable income year so that youcan, you know, write off a whole
bunch of expenses and lower yourtax liability, And then your
thought is you're just going tosell it the next year.
the IRS does is when we takethat, you know, so say in
Kevin's example, we depreciate$50,000 worth of the vehicle in
(36:10):
year one.
then if we go to sell thatvehicle in year two, because
depreciation is considered anordinary operating expense, you
know, in the practice in yeartwo, when we sell that, now we
have to recapture thatdepreciation, which is
essentially kind of like, youknow, like, in the simplest
terms, Like adding$50,000 worthof income to your return in year
(36:31):
two.
So, some people don't realizethat and they, they sell it in
year two and then they're like,well, like, why is my tax bill
so high?
And it's like, well, because youtook this expense in year one,
you had to recapture it in yeartwo and don't get that benefit
plus it's hurting you a
Evon (36:47):
That, this was actually going to be my next question is
what if you need to get thevehicle out of the practice?
You're going to buy a new one.
You want to give it to a, one ofyour kids.
how does that work?
And especially if it's an Scorporation, if you are
distributing it out of thepractice, it's, It's considered
a sale.
Is that correct?
Right.
That's exactly.
So, you know, anytime you, youdistribute it out, of the
(37:10):
practice, you have to distributeit out as the fair market value
of the car, and so that couldcause some problem with the car
being in an S corporation.
it.
And so that depreciationrecapture is something to think
about, right?
You get the benefit of thatdepreciation and you go to sell
it.
You get that depreciationrecaptured up to a certain tax
(37:32):
rate.
You have to pay taxes on that.
Kevin (37:34):
And I mean, in, in your example, it's even worse when
you distribute out the car,right?
Because it's a, a dim sale asthe fair market value, even
though you didn't really, reallyreceive any cash.
You, just take the car out.
Now you pay tax on it.
Evon (37:49):
Yeah.
You, you give it to, or yourcorporation gives it, gives it
to your, your child or however,you know, switch titling,
however that works.
You don't get cash in return,right?
Your kid's not paying you forit, but you have that deemed
sale.
You have that amount in your taxreturn.
For the most part, you might seethe, the sale value lower than
the originally purchased it.
(38:10):
So maybe you're not, Having topay it on the full amounts, if
I'm understanding thatcorrectly, but not exciting,
right?
That's definitely not a surprisethat you want to see at tax time
when you're looking at your taxreturn and seeing what's going
on.
Jackson (38:23):
I would just add to it that, you know, a lot of times
that's why sometimes it willkind of push people into maybe
just tracking their miles anddoing it that way is because A
lot of times, Kevin and I, we'rethinking through, you know,
here's maybe two or threescenarios down the road that
could potentially negativelyimpact you.
And sometimes when they'reworking with the practice owner,
(38:45):
I mean, they're really focusedon this year, which is great.
and so sometimes there is maybethat disconnect, you know, where
we're thinking five years downthe road and they're thinking,
you know, in year one.
And so, that's why it's just,it's good, it's healthy to have
kind of conversations aroundthis.
Our goal is just hopefully toask those, those questions so
that we can understand.
(39:05):
You know, is this a vehicle thatyou're, you know, maybe you've
had your practice for a year,you're hoping to have this
practice the next 30 years and,and let's, we want to get a
vehicle in there.
So that way as you're doing workrelated stuff, you've got the
practice vehicle for it.
You don't have to use yourpersonal vehicle to do that.
And so as we talk through thosescenarios and just get a better
understanding of, because again,everybody's, Situation is unique
(39:28):
and individual to themselves.
And so, you know, as you either,you know, maybe you're one of
our clients, maybe you'reworking with a CPA or you're
working a, a tax professional,make sure that you explain to
them not only the purpose ofbuying the vehicle for, for this
year, but what your plans aredown the road.
And, and that will kind of helpthem better guide you as well.
Evon (39:47):
Yeah, I think that's great.
And the mileage definitely seemslike the simpler option.
You don't have to deal with thatdepreciation recapture.
in terms of it, just sort of ageneral thought in terms of
depreciation, there are waysthat we've talked about to sort
of accelerate much of that intoa current tax year, or you can
sort of take it on the, thestandard, the standard schedule
(40:11):
over a certain amount of years.
Talking about, well, you know,should you accelerate it?
Should you more align thedepreciation with the actual
cashflow, especially if you'reborrowing to, to buy the car?
Do you have any general ways ofthinking about that?
Whether to accelerate, whetherto just take it over a standard,
schedule?
What, what are your thoughts onthat?
Kevin (40:30):
Yeah so you know, most of the time, the tax structure for,
most of the businesses, they areLLC, filing tax as corporation.
So even if they take thedepreciation, it's the reduction
of the income, but that incomeis being passed down to their
personal tax return, right?
And you know, let's, you know,on a regular schedule, you
(40:53):
depreciate the same amount overfive years, right?
on an accelerated schedule, younormally depreciate more at the
beginning and less at the end,right?
So you really have to take alook at what the income, in
current year versus the incomein the future, right?
Let's say I make less of anincome this year and my higher
(41:16):
tax bracket is, you know, 15%.
Maybe I don't want to take thataccelerated depreciation.
If next year my income is, Wayhigher and, you know, in the
future, I may have my highesttax rate is 37 percent for
federal tax, right?
So, I mean, it's, you know, you,you, do you rather to take that
(41:39):
reduction now at the 10 percentrate, 15 percent tax rate
benefit, or you want to takethat deduction in the future
when your tax rate is 37%,right?
The higher the saving in thefuture is, so it's more of a tax
strategy and planning.
You know, like if it's, if it'sa, if you own a, own a practice
(42:00):
and you already have plenty ofdepreciation from equipment,
from, you know, in the currentyear, if you just barely have a
renovation, you already haveplenty of depreciation and now
your tax rate is 10, 15% and youin a good zone.
I don't think you shouldaccelerate.
Right?
maybe save some of thosedepreciation next year when you
don't have any, bonusdepreciation or any 179 from
(42:24):
equipment or build out and takemore of the depreciation the
next year.
it's all about planning and youknow, we as accountant like to,
you know, help our client withthat all the time.
I mean, we, we got thosequestion all the time.
That's why.
The annual tax planning orquarterly tax planning, they are
pretty crucial.
Jackson (42:43):
It just, it can be an issue.
We've got too many expenses inthe practice this year.
And so, you know, fully takeadvantage of, you know, maybe on
your individual return, thestandard deduction, some of
these other things.
You know, might make sense to,let's, let's hold off on some of
these expenses and push thoseinto future years.
And the nice thing is, with theappreciation, in the way that
(43:06):
IRS allows us to do it, is wecan pick and So, you know, they
have their default method, wecan elect to do more of what's
called a straight line method,spread that evenly throughout
the year.
So, yeah, there's definitelyplanning opportunities around
looking at different scenarios.
Evon (43:21):
It sounds like it just comes down to the projections
and planning.
Looking over the next couple ofyears, thinking about how long
you're going to keep it.
And, we're kind of aninteresting time now where we've
got a, a tax law, much of whichis going to sunset over the next
couple of years.
So large parts of this Tax Cutsand Jobs Act, 2026 tax year and
beyond are going to revert backto prior tax laws.
(43:44):
we've got QBI deduction, that'sCurrently present, that may not
be, I don’t know, we don’t know,but is currently set to not be
2026 and beyond.
So, we're kind of in atransition period too, so I
think it makes a lot of sense totalk with your, your
professionals, talk with yourtax professional, project out
the next couple of years and seewhat, What the numbers look
(44:05):
like, knowing that transitionperiod is going to happen, or
you might be in a place whereyou're phasing out of QBI or
some other deduction or credit,and that accelerated
depreciation may help you phaseback into it.
So, it's a great opportunity totalk with your tax professionals
and, and think about more ofthat long term planning, even
outside of just this tax year.
(44:26):
And there are some other nonfinancial considerations to keep
in mind, something that I thinkabout.
number one is liability andinsurance, and I don't even have
all of the answers to this sortof thing to think about.
But if it is a business ownedvehicle and your kids are
driving it, are there liabilityissues if they get in a car
(44:46):
accident?
You know, if you're an olderdoctor, you've got teenagers
that are taking it, are thereliability concerns?
insurance concerns?
If it's owned by the business,it needs to be insured under a
commercial policy.
Talking to a broker before thiscall, those commercial policies
are going g to be more expensivebecause it's assumed that it's
taking more risk under thepolicy.
(45:08):
And you need to make sure thatif your kids are taking it.
You need to make sure you haveall of the drivers as name
drivers.
You don't want to forget any ofthat.
So there's these non taxconsiderations that you want to
keep in mind.
financial costs.
So if you are buying a largevehicle over 6,000 pounds, just
for the tax benefit.
(45:30):
You're going to be buying a moreexpensive vehicle.
It's going to be a cash hog overthe years.
So you're going to be payingmore over time for that.
And it's important to say thisis all for a deduction, meaning
you have to buy the vehicle infull.
You have to pay the full pricefor it.
If you're borrowing, you need topay the interest on that
borrowing just to get adeduction on a certain
(45:51):
percentage of that value.
So you need to make sure thatthis is something that makes
sense for your family, for yourdriving use, for your, for
whatever you're going to beusing that vehicle for.
any other final thoughts on thisvery exciting topic of cars in
the practice and depreciationand all that.
Jackson (46:09):
You know, you got my wheels spinning there a little
bit and that I feel like this isa would be a whole other podcast
topic, but just, you know, whathappens if your kids are also of
driving age are also employeesand working in your practice and
it has implicating.
So, you know, there aredefinitely lots of things to
consider.
You know, we're.
we're at the tail end of, of2024.
(46:30):
You're going into fourthquarter.
you know, if, if, you're findingyourselves, looking at your
financial statements, you know,wondering about these things,
you know, now's the time to havethose conversations with your
CPA.
I don't wait until Yeah.
but to say I'm at the, I'm atthe car dealership and I'm, I'm
wondering, should I.
I buy the car?
Should I not?
I mean, that, that is, that isnot the best time to ask your
(46:53):
CPA if you should be purchasinga vehicle or not.
so so just know we, we've got,you know, three more months, to
kind of work through thesethings.
The other thing too, interestingwith 2024 is it's a, it's an
election year.
So as we look at some of these,you know, tax legislation, it's
going to be sunsetting orexpire, we could be working with
(47:13):
a whole different set of rulesnext year.
So we, we try and operate thebest we can with, with, what we
know.
I mean, we, we have been ininstances where we get into the
next year and they, they madestuff retroactive.
Hopefully that's not the casebecause that's always a
headache, but, But just know,know what we know now, as we get
into the next years, andprobably just because this
(47:36):
podcast kind of lives on theinternet forever, if you're
listening to this in 2025 andthings have changed, just, just
know, reach out yourprofessional.
Kevin (47:46):
Yeah, exactly You know, imagine if you, you know, this,
this, comparison will be kindof, understandable for all the
listener here.
you go to a doctor and ask fordiagnostics you know, each
doctor would give.
You know, perhaps a slightlydifferent version of the
(48:07):
diagnostics or the medicationthat a patient needs to have.
Similarly, I mean, the tax code,the, the U.
S.
tax code is pretty complicated.
each person, situation is alsodifferent and, and that creates
some complexity here.
So, the advice here as a generaladvices, but please talk to,
(48:33):
your own CPA, of when to buy acar, how to structure that, how
to put it into the business,what method of expenses or
depreciation you should take.
it's vary from different,businesses, I mean, just the,
you know, in, in my hand right,right here, I have this,
playbook of, depreciation and onthe topic of depreciation for
(48:57):
clarification of the tax code.
have probably about, you know,500, 600 pages and, and, and
believe it or not, this thing iscalled Quick Finder.
500 page quick finder, shortcutbook, huh?
Yep.
500 pages of depreciation andcode, and that is already quick.
(49:18):
So, you know, from time to time,the depreciation of cars using
can be pretty complicated.
Evon (49:24):
And I, I appreciate both of you coming on and bringing as
tax professionals, the realityof the situation, both in terms
of how to do it appropriately.
But also in terms of the, theactual audit risk, you know,
that, that businesses face, itmay that change over time, sure.
But, but you, you bring thereality to that.
So listen to Jackson and Kevin,go talk with your own tax
(49:46):
professionals and see what isappropriate for your specific
situation.
based on your circumstances.
And, and with that, I appreciateboth of your time.
Where can people find you andfollow you and learn more about
what you're doing?
Jackson (50:00):
Yeah.
I mean, probably the best way.
so our, our website,refractionalcfo.com.
if you ever want to hop on put a15 minute call for us, you know,
with us, or if you have aquestion, you can go there.
There's a big button, you clickon it, it takes it, takes you to
a calendar.
You can schedule a 15 minutecall with us.
and that's probably the easiestway to, talk to
Evon (50:20):
Perfect.
We'll throw all of that in theshow notes as well as past
episodes we've done together.
So I'll add those into the shownotes too.
If you have questions, reach outto Jackson, Kevin, and in the
meantime, we will catch you allon the next episode.
Take care.
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