I specialize in helping Real Estate Brokers and Agents with their taxes, and I've prepared nearly 1,000 Realtor tax returns over the years.
The one area where agents consistently fail to maximize their business deductions is car and truck expense.
After buying a home, buying a car is your second biggest expense! It's one you should fully capitalize every year as a business deduction.
Has this ever happened to you?
It's April 14th - the day before the filing deadline.
You get a frantic phone call from a sleep-deprived CPA that goes something like this:
CPA (hair on fire): “Hey, how many business miles did you drive last year?”
Agent/Broker (licking index finger and pointing it skyward): “Um, 10,000 miles(?)”
Then your CPA hangs up the phone, writes down 10,000, multiplies it by whatever the IRS standard mileage rate is for that year... and jumps onto the next client return.
Now I don’t know about you, but there’s two things that drive me nuts about this scenario:
1. The first thing is you probably under estimated your mileage. Maybe you know your record keeping has holes in it, so you give a conservative number. (After all, who wants to get in trouble with the IRS?)
2. The second thing is... and it doesn’t matter what kind of car you drive, from the smallest sedan to the biggest SUV... everyone gets the exact same IRS mileage rate. Even though everyone knows it costs way more to drive an SUV than a sedan!
The True Cost Of Ownership
It may surprise you to see how much it really costs to operate your car
The IRS mileage rate for 2020 is 57.5 cents per mile.
But the AAA publishes a Vehicle cost Operating Survey every year. A recent AAA study shows your cost per mile to drive a medium SUV at 68 cents per mile.
If you drive a large SUV, or a pickup, your cost goes up to 72 cents per mile.
So you’re losing money every time you turn the the ignition when you claim the IRS mileage rate at 57.5 cents per mile.
You say “hey, no big deal... that’s only a difference of 10 -14 cents”.
Thousands in taxes you shouldn't have to be paying
But I say “wait just one minute.” Because when you multiply that amount by 15,000 miles, you’re missing out on a $1,500 - $2,100 tax deduction.
Wait, what? You don’t think you drove 15,000 miles?
Let’s talk about that for a minute... (seriously!) The AAA survey is based on the assumption that the average American drives 15,000 miles annually.
But you’re in real estate. You’re way above average when it comes to driving.
Heck, you practically make your living on the road!
Even if you only use your vehicle for business 80% of the time, take my word for it, in most areas of the US you’re driving 15,000 or more business miles.
Is there a better way?
So here’s what you need to know. You have two options when it comes to maximizing your auto and truck expense deduction:
1. Use the IRS Standard Mileage Rate, or
2. Use the Actual Expense Method
You can go one way or the other. You can’t double dip. You can’t take mileage... plus what you pay for insurance, gas, or repairs, for example.
It’s the mileage rate ... OR... actual expenses.
So how exactly do you maximize your deduction using the actual expense method?
Stay tuned, because I'm going to show you something you've probably never thought about when it comes to auto expense deductions in part 2. It may just save thousands in taxes you don't have to be paying!
Jim Flauaus specializes in helping Realtors reduce Uncle Sam's tax bite. Contact him at 757-346-1040 or visit ChesapeakeTaxRelief.com He provides tax prep, tax planning, and tax resolution services, and is authorized by the federal government to practice before the Internal Revenue Service in all 50 states.