The Optometry Money Podcast

Can You Buy a Car in Your Optometry Practice as a Business Expense with Jackson Pace and Kevin Dang, CPAs

• Evon Mendrin • Episode 116

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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:


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.

Evon:

Hey, everybody. Welcome back to The Optometry Money Podcast, where we're helping OD's all over the country. Make better and better decisions around their money, their careers and the practices. I am your host, Evon Mendrin, Certified Financial Planner(TM) practitioner, and owner of Optometry Wealth Advisors an independent financial planning firm just for optometrists nationwide. And thank you so much for listening today. Appreciate your time and attention and on today's episode I am joined by Jackson Pace and Kevin Dang CPAs of Refractional CFO. And we dive into a really common question that we hear from OD practice owners. And that's, if you're planning to buy a vehicle, should you purchase it under the name of the practice, so that you can depreciate it and get that tax deduction. So how do we handle vehicles in your business? We talk about what is required for a business to own a vehicle and to take a tax deduction for that. We talk a lot about actual business use of your vehicle versus personal use. we talk about the basics of how depreciation works. I should or shouldn't you accelerate it versus take it over a standard schedule. Then we talk about non tax considerations for owning a vehicle that's especially a personal vehicle in the name of the business. So we give you a lot of information to help you talk with your own tax professionals and to come to informed educated decisions on what to do with this. reach out to me or Kevin and Jackson, if you have any questions on any of this. you can check out all the resources we mentioned here in the show notes, which you'll find out the, education hub on my website, www.optometrywealth.com while you're there, check out all the other articles and resources and episodes we've done. And you can also schedule a no commitment introductory call. We can talk about what's on your mind financially. And how we serve optometrists to navigate those same decisions all over the country. Without further ado. Here is my conversation with Jackson Pace and Kevin Dang. Welcome back to the Optometry Money Podcast. I'm Evon Mendrin, your host, and I am excited to welcome back to the podcast, Mr. Jackson Pace and Mr. Kevin Dang, CPAs at Refractional CFO. Thanks for coming back on. Yeah no, thanks for, thanks for having us, Evon. Always a pleasure to be on the podcast. I, I'm excited to talk about what I feel is a topic that's commonly asked about. You, you know, the three of us are, Inside of a lot of the same online optometry communities and we see the questions that are asked. And a lot of the times I feel like at least over the last six months or so, I feel like a question that's come up consistently is you have a practice owner, you're planning to buy a new car and they're wondering, they're asking the group, Hey, can I, or should I buy this car in the name of the practice for the purpose of depreciating and getting another tax deduction? And, you know, I, I've looked through the tax returns of my clients and it's not uncommon that we get to the, the practice tax return and you see, you know, a Tesla on there, 100 percent business use, you know, see, you kind of start to see that on tax returns a little bit. I'm sure you guys get asked about this a lot and see that a lot, maybe with past or current tax returns. So I want to dive into this topic and kind of get down to the core of it, the actual facts, the matter to say, can and should an optometry practice owner, purchase the vehicle in the name of the practice and for the purposes of taking that depreciation as a tax deduction. So let's just start with some of the basics. What are the basic requirements? What's needed for a practice or any business to own a vehicle and to take that depreciation as a tax deduction? What are some of the general requirements? Yeah,

Jackson:

Yeah, I can, I can touch on this one just a little bit. So with a vehicle, they're really just like any other qualified business expense. So sometimes they stand out because there's, for whatever reason, there's usually a lot of confusion, maybe around vehicles and can the practice own them? how does the practice actually expense a vehicle? even get questions around, do we have to wrap our vehicle in advertisements to be able to do this? Or, so, so for whatever reason, we, we come into a lot of, issues around the clarity of is it a qualified business expense? And so the first hurdle that we have to get over is. That question exactly, like, is it a qualified business expense in the practice? so, as you look at your practice, you know, especially maybe you're listening to this podcast right now and you're kind of at that crossroad of needing a new vehicle and, and, you know, we're, we're getting toward the end of the year, fourth quarter, and a lot of times this is when we start doing tax planning. Maybe you're looking at your financial statements and seeing that you just had a really good year and you have a lot of income, which means, you Your net income is up, which means your potential tax liability is up. And so we hit these crossroads and it's like, should we now purchase a vehicle and does it make sense to do in the practice? And so, we answer that question, you know, just kind of think through the needs of the practice, you know, obviously if you're, maybe the optometrist, you own your practice, maybe you are an independent optometrist doing 1099 work, for multiple practices. you know, maybe you have a need with your staff members. we've seen some practices from time to time, they'll purchase vehicles for the practice, for the purposes of being a courier, which means, they have a full retail optical, they have patients that are coming and going, and, and one of the benefits as they provide their patients is when their glasses are done, they're actually going to have one of their employees, yeah, think of it like the Uber of the optical world. one of the employees hops in the vehicle, they take those glasses from the practice right to the patient's house. They help them try it on and like in my mind, that's like the coolest experience. Like I wish I just had glasses that would show up magically at my doorstep. And, but as we think through that scenario, I don't think anybody listening to this podcast would question, like that's a business expense. You know, we're having our employees up in the vehicle, drive it down to the patient. And so of these scenarios are pretty black and white. Like in that one, that that's definitely a business expense. Now, kind of get back into the mindset 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 what we're doing with the vehicle. So, if you're purchasing this vehicle and you just use it to take your family on vacations, Go to sports games, run the kids around, do that type of stuff, it's not really a business related purpose. You know, taking your family on vacation, even though it's fun, maybe you can kind of squeeze a CE conference in there to maybe get this into the business realm of an expense.. but there's a lot of times that we're just using the vehicle for personal reasons. And so, for most of our practices, most of the doctors that we work with, what ends up happening is we, we have a vehicle. And part of it's going to be used for business use of it's going to be used for personal use. And so comes into the equation. Well, how does that work? And as we get into our tax return, and as we actually book some of these expenses, I mean, QuickBooks, like how do we do this? And so, maybe Kevin, do you want to kind of go into just kind of the, maybe more of the technical details of how we actually do this?

Kevin:

Yeah, yeah. so let's, let's break, Evon's question down to two, two parts, right? How, how do we own a vehicle through the business and how we deduct the expense, right? and sometimes those two things does not equal to each other. So let's talk about ownership first. of time, we get the question, okay, do, do I buy a vehicle through the business or should I buy Well, if it was like a straight cash deal, so yes, you can, you can buy it from the business. from the business bank account. However, if you go out and buy a car and most of the time you would have some financing with the car, you know, you get a loan the dealer or from the, from the car saleman. in that case, you know, maybe not be so practical that car is going to be under the business name because most of the time, you car saleman don't, don't like the car with a loan be under an LLC What happen if you default on that loan? They, they can't really kind of, get recoup all of that, right? They, they can, they can recoup the car, but by the time they, they sell out the car, they may get paid less than the amount of the loan that you have on the LLC So in that case, most of the time you have to buy the car under your name, right? In the real world, that's what people do. So in that case, it's really hard 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 car with along with the loan to the company. So the bookkeeper may record the car and they also recognize the loan. or if it's just a straight cash deal, that would be really simple, right? The cash is from the bank account and we recorded the car in the balance sheet. now we already talked about the ownership, right? Between either buying from the business or buying from under your own name and then contribute it to the business, well, but ownership doesn’t mean that you can get to deduct the expense or depreciate the whole car. Right, you may record a car of$100,000, you know, on the books, but the next question is the use of the car. And the use of the car is what gets you the deduction. We have to look into the fact, the IRS would ask, what is the percentage that you are using that car for the personal purposes versus the business purposes, right? And we have to look at fact and circumstances. In the example that Jackson has, if somebody has a car that solely used for the business and that is 100 percent of the business, then we can, know, depreciate the whole car, right? Obviously, there are, there would be limited, limitation on the amount of depreciation each year that you can take. You may have to spread it over the year because of the limitation. but if your business, you only use the car, let's say, for six months, 70 percent the time, you know, that for the business and 30 percent of time you use for personal purposes, then you can only be depreciation. You know, you can only take depreciation on 70 percent of the cost basis of the car of 100, 000, right? and, and so, so that, know, and then in the, in the daily use, you have to think about what, all the expense for the personal use and what are the expense for the business use just like any other business expense versus the personal expenses that we have. I hope, you know, that answer the question on how we record and deduct depreciation

Evon:

that's a great point on the financing issue. At a minimum, it may very well just make it more expensive to get financing if you need to through the business rather than individually. But, if, if you're unable to get financing, perhaps maybe your business is, is too new, relatively new, then you'd have to do sort of this workaround. Buying it individually and then contributing into the practice as an asset. And, and, you know, a lot of it seems to come down to use, right? Just like anything else is, are you using the vehicle for business use? Or is it in reality a personal vehicle? And Right. a lot of the times, especially when you kind of read a lot of these questions or a lot of the answers to these questions, it's quite clear. It's not a business vehicle. And in fact, it's explicitly stated, it's a personal use vehicle. So it does come down to business use. And let's talk a little bit more about business use. We, Jackson gave a perfect example of one I I've actually not seen before. of clear, absolute business use. Really cool, creative way to use the vehicle in the business. What are some other ways to use the vehicle? You know, for example, is driving from home to the practice considered business use? Is it from the practice to the bank? Like what, what are some of the ways that outside of that kind of creative use would be considered business use?

Jackson:

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 really good 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're a practice. employees that are using their vehicle if sometimes that comes into play like how do we How do we treat their vehicles? I mean if we're focused more just on maybe the owner their vehicle in and what constitutes You know a couple things you know one a lot of times doctors are on call So a lot of times they have to have a vehicle to be able to get back and forth from the practice the other thing that we have to consider in the IRS kind of looks at this through the lens of are you actually doing the work in your practice? for a lot of, a lot of the clients that I work with, they have a dedicated office in their home. That's kind of their primary office for the practice. They don't, they don't have a separate office inside their, their building. I mean, when we look at how precious real estate is anymore and how expensive it can be, sometimes it just doesn't make sense to build out a nice big office that you can do a lot of the paperwork and the administrative work and the practice at your actual retail location. we're a little more wise in the way that we design it. Maybe we make the optical a little bit bigger, but usually what ends up happening is, is now we have really the back office of the practice is happening in your home. So we have these instances where we have to get from more or less the headquarters of the practice, which is. is at your, at your home, it may be the actual practice location or maybe we have to stay on a weekend, we're running around doing errands, we gotta go pick up stuff for the practice. if you think through these different types of trips that you're taking, you have to think through it, is, is this a business trip that I'm taking, is this a personal related trip? the nice thing about this, is there's lots of apps out there that help us just make this a little bit easier because if if we had to end every day by taking out a paper and pen and writing down in a notebook, you know, I drove my, you know, when I got into my vehicle in the morning, the odometer was, you know, a thousand miles and at the end of the day it was, miles and You know, the breakdown of this 34 miles is such that, you know, this, this mini was, personal and then this breakdown was business. Nobody even want the headache. And so, we can do is, is through the use of some of these different apps is we can start to track these trips. And so, it goes back into, you know, maybe to build on a little bit with what, Evon was talking about on how we actually depreciate these vehicles in the practice. You know, one scenario is the practice can or less own the vehicle. We depreciate that and that's just a of expensing the cost of that vehicle, over time. The other way is we can keep track of the mileage. So in the year 2024, right now, the IRS, they come out and every year they set a standard mileage rate. so for this year, every mile that you drive your vehicle, you can actually reimburse yourself 67 cents per mile. So a common question and usually when I, you know, I have people calling me asking me about vehicles, what they're trying to figure out is How can I cover the loan payment by, you know, basically how can the practice cover the loan payment more or less? so they're not too worried about, is this going to be an asset of the practice? Is this going to be a personal part of it? They just want to go out. They want to purchase a vehicle they just want some help. They want to be able to pull some money out of practice be able to make that payment. And so sometimes the easier way to go about this is track your mileage. So say maybe over the course of a month, know, if you drive a thousand miles. That's$670 that you get to reimburse yourself for the use of that, vehicle. 2,000 miles, that's$1,340 that you get to reimburse yourself. the nice thing about these reimbursements is they come back to you tax free. So it's not like the practice is going to check for$1,300 and now you've got to pick that up as income. That's a reimbursement for the use of that personal vehicle. And so, you kind of get the best of both worlds. It's an expense on the practice side, but it's also money into your personal bank account that now we can go and make that loan payment. That's kind of the goal they're overall trying to achieve. With that, anything you want to add to that, Kevin, as far as Hopefully I didn't anywhere and give anybody bad, bad guidance.

Kevin:

Everything comes down to, to fact and circumstances. Right. So let's breaking down what. know fundamentally, the IRS say what is a business expenses, and it's being defined as ordinary and necessary, right? Now, ordinary means something Incur, you know, frequently and answer not out of the norm, right? If you say it's ordinary, it's versus non ordinary. So like, it has to be kind of reasonable, right? Making sure that you are not so stepping out of the zone, stepping out of the norm by so much, right? you know, would, would a reasonable person think that the thing that you're doing are reasonable? necessary mean, is this kind of necessary for your business or it's not necessary, right? Is this just a, something that your business need or is just something that out of vanity that you have, you know, or your hobby that you're doing this? So, you know, you can be creative if, if, if you have, a, an office, an ad, you know, with lab or at home and you need to run back and forth between the practice and, the room at home that you use for equipment and, you know, for the edger and, you know, you know, that would be and necessary, right? if it, but if it was like a run to, grab a drink with some friend or going playing golf now that would not be ordinary or necessary for your business. And so. just sit down and take a deep breath and think about the facts and circumstances, there are ways to make it work, it depends on your needs, so.

Evon:

Interesting. And so it seems in terms of the requirements, the business has to own the vehicle in some way, whether it's purchased by the practice or contributed into the business. The, the other part of it is what we've been talking about is business use and some percentage, some high percentage of business use and Is there a point to where the business use is too low? For example, if it's dropping under 50%, like does the percentage of business use impact it? And if so, in what way?

Kevin:

Right. you know, let's first talk about depreciation. That, that two part, if you take the actual experiment, you can, if you do depreciation, that's mean you depreciate the car. And then for any following years you take the actual expenses, right? Maintenance, you pay, go out and pay for the gas. That's the actual method, right? With the depreciation. If you take 179. the business use has to be about 50 percent of the time is the business use, then you take 179. Now the bonus depreciation doesn't have that kind of limit, right? So no percentage on the business use that can take the bonus depreciation. Obviously, you can only take the percentage of the business use for depreciation, like I mentioned. if you, you have like 20 percent of the business use for the current, you of$100,000, then you can take the bonus on that 20,000, Portion for the bonus. Now, 179, it has to be above 50%, of the business used for 179. Now, 179 is still here, strongly, you know, it's still going on. Bonus depreciation is phasing out this year 60 percent bonus depreciation, right? Let's say. In my example, let's say the car is 100, 000, you only use 20 percent of the car, right? you can depreciation 20%, you can 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 like actual expenses, then you have to think, okay, if I pay for the gas and my gas bill is$100 to fill up my tank, and I only use like 30 percent of that on the drive for the business, then I deduct 30 percent of that, right? Which can get pretty complicated in real life just to try to split out all, right. It's a trick. So maybe perhaps the easier way is to use the, the, the mileage, right? And with the mileage, then you don't take the depreciation. You just say, You track the mileage time that by the rate of 70, sorry, of 67 cents a mile in the year 2024. And with the, with the mileage tracking, you don't do depreciation, you don't have to keep the receipt, right? So, you know, in, in theory, you have to do a certain thing, but in real life, perhaps it's easier to use the standard mileage if you co mingle between business use and personal use, right?

Evon:

That's, that's not as exciting, Kevin. That's not, it's not a tax savvy strategy you'd see on TikTok.

Kevin:

Right, right. Well, you know, in the past, you know, car use has been always one of the, forms that likely increased your audit risk, right? And, you know, Jackson and I, when we give advice to the client, we normally give advice of what is, you know, in theory, what is being required, vs. what is actually being done. For example, a lot of client has commented to us and, You know, and ask, okay, if I, if I use, I use mileage or use car in the business, that increase the risk of me being audited? And, and we would give, you know, list out all the guidances and they can choose between the actual method versus the mileage. And, and so, you know, we, You know, here, here's the, some interesting statistic that hopefully, you know, going to have to expand the, some of the next conversation that we're going to have. So, since 2011 to 2019, right? The risk of an S corporation, if you have an LLC filing tax as an S corporation, the audit risk is 0.1%, pretty low, right? Very low. Yeah. Right. Now, if you have, you are a sole proprietor 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 is nine times more, of a likelihood of being audited It's, actually surprising 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 than the audit rate of an S corporation, 24 times. If you're making$200,000 or more and filing tax as a Schedule C, your chance of being audited is 1.9%. So that's 19 percent time, you know, more than, an S corporation, right? So, know if you have like a car or taking mileage under the Schedule C, that will be pretty, know, pretty high risk right? if you're in an S corporation and take the deduction of the car and the mileage, mileages, you are less likely to be audited. Well, I don't know if because of core issue or just because of the structure, like I said, the S corporation being audited is so low versus a sole proprietorship filing tax as a Schedule C, 24 times more of an audit 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 taking the car depreciation and the car expenses and the mileage versus an S corporation as a whole, right? And I think, you know, we, we, we talk about, you know, in, in real life, you know, how people doing it and the tax structure is also affect that, that risk of being audited.

Evon:

Is fascinating and I think a lot of practice owners would hear those low percentages and start to get some ideas, right? Ultimately, you can put whatever you want on your tax return. And until you get called out for it, you don't have to defend it. But if you do get the letter from the IRS, or if you do get a notice that you're going to have an audit, then you have to defend it. And Right. ultimately, you know, I'm sure there are costs and time and frustration with going through an audit. But even if you are audited, if it's legitimate, then and substantiated, then you don't really have to worry about it. I mean, I'm not the tax professional here. I'm curious to know your perspective on that. But if it comes down to it and it's not substantiated, well then you have to defend it. If you are the unlucky one, then you have to go through the responsibility with your tax professional or pay a tax professional to help you through it and try to defend that. Have you been through that experience? I mean, what has that been like for you?

Kevin:

Yeah. I mean, being audited by the IRS is not the most, pleasurable experience. know it's, it's really difficult, to go back to the record and you have to keep really good record to prove, to substantiate those expenses. and, the requirement of car, you know, the use of the car is. for mileage tracking, if you're tracking the mileage, you have to have the mileage log. that's why, you know, we, we've been recommending people to keep track of the mileage. Now, we, we talk about in theory and how to defense in the case of audit. Then let's switch back and talk in real life, how people do it. I have seen clients who come to me and say, I don't keep track of the mileage wealth Log. I kind of calculate out the number of miles I drive a week, and then kind of times that by 52 weeks in the year and get the mileage. Right? Obviously, you are required by the IRS to keep track of the log. But, in practice, that can, be proven to be a challenge for our client. Right. And, we try to think. Okay, we know that we want, we have to keep track of the mileage log in case of an audit, but what is the chance of you being audited, right? What is the result and the risk of you being audited, you know? What is the fine and the penalty, and increase of tax, right? If your estimate is really close to the actual mileage you’re driving, you know perhaps that won’t be too bad, right? You know, the IRS may assess you some additional tax, but that amount can be small. Versus, if you take a really unreasonable amount of mileage, really high, then that would create a higher tax bill, a higher penalty, and are in a business world, so we want to take a look at things as, you know, based on what is the risk, right? What is the cost and what is the risk versus the benefit? So I think, for myself, as a professional, obviously, We want to have the client to follow the rule as best as they can, but a lot of time, it been proven to be a challenge.

Evon:

Yeah,

Jackson:

And I might just add, you know, as we think about this, you know, let's be smart about it. If, if you only have one vehicle and you're claiming on your tax return that that vehicle is 100 percent business use, every time the IRS comes and it looks at that, they're going to say, well, what vehicle did you use for personal use? then you're, they're going to kind of just catch you with this. Well, yeah, nevermind. I did that wrong, you know? So, you know, if you're going to do it, not saying that it's bad. I mean, it's a, it's a legitimate expense that we can take, but sometimes our, our vehicle expenses, we work with a lot of, A lot of our clients have, you know, rentals and real estate properties as well. So the other thing we have to consider is if you're, you know, your business portfolio or whatever you want to call that extends outside of your practice, there could be cases where maybe you're using your vehicle for use in the practice, maybe you have a rental property, so you're using that vehicle, run around and, you know, check on the rental property and, you know, you've got to do repairs and maintenance. So one vehicle could kind of extend over multiple different schedules on your tax return and that's where usually it's just easier to do the standard mileage rate. You can, you can keep track of those miles, like you know, we've said that they have the apps and everything that will help us keep track of that. And even if you don't have an app, I mean, the simplest form is just pull up a spreadsheet. It may be Once a week or once a month, once a quarter, I mean, at least once a year, go in there and create your mileage log and the mileage log doesn't have to be complicated. I mean, you're literally just putting dates, you know, why did you make this trip and how many miles was it? So you can keep it pretty simple. But if you do that one thing and just at least have a record of it, you know, then if it does come 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're going to disallow it. then at that point we can hand this stuff over to them and. And the reason why they love to go after vehicles is because, for an IRS agent, it's just low hanging fruit. A lot of times, 90 percent of the people, they just aren't keeping the mileage logs, they aren't, you know, doing what they're supposed to be to actually substantiate the expense, and so, an easy one for them to come after.

Evon:

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, my own thinking. I'm again, I'm not the tax professional. And there are other ways, kind of like the mileage, like you said, the mileage is still a way to benefit from your business use. Of the vehicle without having to jump through some of these hoops. And, Kevin, appreciate you, you going through some of those, basics on depreciation. You talked about two ways to sort of accelerate that depreciation into a current year. Section 1 79, which has that 50%. minimum, bonus depreciation, which is at 60 percent and decreases over the next few years. And then just the regular depreciation schedule, which I think is five years. Right.

Kevin:

Yeah, yes. it's over five years

Evon:

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:

Yeah, it depends on the type of car. the, you know, car depreciation has own section of rule, additional rule need to be followed. So you know, divide it into, passenger auto, and that is, you know, the gross weight is under 6, 000 pounds, and then, they also have truck and van, so it weighs 6, 000 pounds or more, they use the gross weight to kind of divide out the class between luxury auto and, trucks and vans. And of that, you know, let's say if you buy like a luxurious car, and you want to depreciate, you know, obviously in, in, for the math, I assume that this is 100 years for the business. you thought that you can, if you take 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 you can take depends on the, gross weight limit. So I believe like for the, gross, you know, for the passenger auto, the first year depreciation 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, when it's time to buy the, the car.

Jackson:

The other thing to consider too with depreciation is you are going to purchase a vehicle for your practice, and again, sometimes we, we scare people. I mean, it is a legitimate thing. You can do it, and, and not run into any issues as long as, and that's why kevin and I are here. That's why we created Refractional CFO is really just, if we're going to do it, let's do it right. Let's make sure the I's are dotted, the T's are crossed. And then that way we just don't have to worry about it like. just worry that let's just wait until statute of limitations is run out. So we shouldn't have to be worried about it every single year, if we, if we just do it right to begin with. but one note on depreciation, is to go back to if you purchase a vehicle, think about how long you're going to have it. If you're just thinking you're going to purchase this for taxable income year so that you can, you know, write off a whole bunch of expenses and lower your tax liability, And then your thought is you're just going to sell it the next year. the IRS does is when we take that, you know, so say in Kevin's example, we depreciate$50,000 worth of the vehicle in year one. then if we go to sell that vehicle in year two, because depreciation is considered an ordinary operating expense, you know, in the practice in year two, when we sell that, now we have to recapture that depreciation, which is essentially kind of like, you know, like, in the simplest terms, Like adding$50,000 worth of income to your return in year two. So, some people don't realize that 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 you took this expense in year one, you had to recapture it in year two and don't get that benefit plus it's hurting you a

Evon:

That, this was actually going to be my next question is what if you need to get the vehicle out of the practice? You're going to buy a new one. You want to give it to a, one of your kids. how does that work? And especially if it's an S corporation, if you are distributing it out of the practice, it's, It's considered a sale. Is that correct? Right. That's exactly. So, you know, anytime you, you distribute it out, of the practice, you have to distribute it out as the fair market value of the car, and so that could cause some problem with the car being in an S corporation. it. And so that depreciation recapture is something to think about, right? You get the benefit of that depreciation and you go to sell it. You get that depreciation recaptured up to a certain tax rate. You have to pay taxes on that.

Kevin:

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 as the fair market value, even though you didn't really, really receive any cash. You, just take the car out. Now you pay tax on it.

Evon:

Yeah. You, you give it to, or your corporation 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 for it, but you have that deemed sale. You have that amount in your tax return. For the most part, you might see the, the sale value lower than the originally purchased it. So maybe you're not, Having to pay it on the full amounts, if I'm understanding that correctly, but not exciting, right? That's definitely not a surprise that you want to see at tax time when you're looking at your tax return and seeing what's going on.

Jackson:

I would just add to it that, you know, a lot of times that's why sometimes it will kind of push people into maybe just tracking their miles and doing it that way is because A lot of times, Kevin and I, we're thinking through, you know, here's maybe two or three scenarios down the road that could potentially negatively impact you. And sometimes when they're working with the practice owner, I mean, they're really focused on this year, which is great. and so sometimes there is maybe that disconnect, you know, where we're thinking five years down the 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 around this. Our goal is just hopefully to ask those, those questions so that we can understand. You know, is this a vehicle that you'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 work related stuff, you've got the practice vehicle for it. You don't have to use your personal vehicle to do that. And so as we talk through those scenarios and just get a better understanding of, because again, everybody's, Situation is unique and individual to themselves. And so, you know, as you either, you know, maybe you're one of our clients, maybe you're working with a CPA or you're working a, a tax professional, make sure that you explain to them not only the purpose of buying the vehicle for, for this year, but what your plans are down the road. And, and that will kind of help them better guide you as well.

Evon:

Yeah, I think that's great. And the mileage definitely seems like the simpler option. You don't have to deal with that depreciation recapture. in terms of it, just sort of a general thought in terms of depreciation, there are ways that we've talked about to sort of accelerate much of that into a current tax year, or you can sort of take it on the, the standard, the standard schedule over a certain amount of years. Talking about, well, you know, should you accelerate it? Should you more align the depreciation with the actual cashflow, especially if you're borrowing to, to buy the car? Do you have any general ways of thinking about that? Whether to accelerate, whether to just take it over a standard, schedule? What, what are your thoughts on that?

Kevin:

Yeah so you know, most of the time, the tax structure for, most of the businesses, they are LLC, filing tax as corporation. So even if they take the depreciation, it's the reduction of the income, but that income is being passed down to their personal tax return, right? And you know, let's, you know, on a regular schedule, you depreciate the same amount over five years, right? on an accelerated schedule, you normally depreciate more at the beginning and less at the end, right? So you really have to take a look at what the income, in current year versus the income in the future, right? Let's say I make less of an income this year and my higher tax bracket is, you know, 15%. Maybe I don't want to take that accelerated depreciation. If next year my income is, Way higher and, you know, in the future, I may have my highest tax rate is 37 percent for federal tax, right? So, I mean, it's, you know, you, you, do you rather to take that reduction now at the 10 percent rate, 15 percent tax rate benefit, or you want to take that deduction in the future when your tax rate is 37%, right? The higher the saving in the future is, so it's more of a tax strategy and planning. You know, like if it's, if it's a, if you own a, own a practice and you already have plenty of depreciation from equipment, from, you know, in the current year, if you just barely have a renovation, you already have plenty of depreciation and now your tax rate is 10, 15% and you in a good zone. I don't think you should accelerate. Right? maybe save some of those depreciation next year when you don't have any, bonus depreciation or any 179 from equipment or build out and take more of the depreciation the next year. it's all about planning and you know, we as accountant like to, you know, help our client with that all the time. I mean, we, we got those question all the time. That's why. The annual tax planning or quarterly tax planning, they are pretty crucial.

Jackson:

It just, it can be an issue. We've got too many expenses in the practice this year. And so, you know, fully take advantage of, you know, maybe on your individual return, the standard 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 those into future years. And the nice thing is, with the appreciation, in the way that IRS allows us to do it, is we can pick and So, you know, they have their default method, we can elect to do more of what's called a straight line method, spread that evenly throughout the year. So, yeah, there's definitely planning opportunities around looking at different scenarios.

Evon:

It sounds like it just comes down to the projections and planning. Looking over the next couple of years, thinking about how long you're going to keep it. And, we're kind of an interesting time now where we've got a, a tax law, much of which is going to sunset over the next couple of years. So large parts of this Tax Cuts and Jobs Act, 2026 tax year and beyond are going to revert back to prior tax laws. we've got QBI deduction, that's Currently 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 a transition period too, so I think it makes a lot of sense to talk with your, your professionals, talk with your tax professional, project out the next couple of years and see what, What the numbers look like, knowing that transition period is going to happen, or you might be in a place where you're phasing out of QBI or some other deduction or credit, and that accelerated depreciation may help you phase back into it. So, it's a great opportunity to talk with your tax professionals and, and think about more of that long term planning, even outside of just this tax year. And there are some other non financial considerations to keep in mind, something that I think about. number one is liability and insurance, and I don't even have all of the answers to this sort of thing to think about. But if it is a business owned vehicle and your kids are driving it, are there liability issues if they get in a car accident? You know, if you're an older doctor, you've got teenagers that are taking it, are there liability concerns? insurance concerns? If it's owned by the business, it needs to be insured under a commercial policy. Talking to a broker before this call, those commercial policies are going g to be more expensive because it's assumed that it's taking more risk under the policy. And you need to make sure that if your kids are taking it. You need to make sure you have all of the drivers as name drivers. You don't want to forget any of that. So there's these non tax considerations that you want to keep in mind. financial costs. So if you are buying a large vehicle over 6,000 pounds, just for the tax benefit. You're going to be buying a more expensive vehicle. It's going to be a cash hog over the years. So you're going to be paying more over time for that. And it's important to say this is all for a deduction, meaning you have to buy the vehicle in full. You have to pay the full price for it. If you're borrowing, you need to pay the interest on that borrowing just to get a deduction on a certain percentage of that value. So you need to make sure that this is something that makes sense for your family, for your driving use, for your, for whatever you're going to be using that vehicle for. any other final thoughts on this very exciting topic of cars in the practice and depreciation and all that.

Jackson:

You know, you got my wheels spinning there a little bit and that I feel like this is a would be a whole other podcast topic, but just, you know, what happens if your kids are also of driving age are also employees and working in your practice and it has implicating. So, you know, there are definitely lots of things to consider. You know, we're. we're at the tail end of, of 2024. You're going into fourth quarter. you know, if, if, you're finding yourselves, looking at your financial statements, you know, wondering about these things, you know, now's the time to have those conversations with your CPA. I don't wait until Yeah. but to say I'm at the, I'm at the car dealership and I'm, I'm wondering, should I. I buy the car? Should I not? I mean, that, that is, that is not the best time to ask your CPA if you should be purchasing a vehicle or not. so so just know we, we've got, you know, three more months, to kind of work through these things. The other thing too, interesting with 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 or expire, we could be working with a whole different set of rules next year. So we, we try and operate the best we can with, with, what we know. I mean, we, we have been in instances where we get into the next year and they, they made stuff retroactive. Hopefully that's not the case because that's always a headache, but, But just know, know what we know now, as we get into the next years, and probably just because this podcast kind of lives on the internet forever, if you're listening to this in 2025 and things have changed, just, just know, reach out your professional.

Kevin:

Yeah, exactly You know, imagine if you, you know, this, this, comparison will be kind of, understandable for all the listener here. you go to a doctor and ask for diagnostics you know, each doctor would give. You know, perhaps a slightly different version of the diagnostics or the medication that a patient needs to have. Similarly, I mean, the tax code, the, the U. S. tax code is pretty complicated. each person, situation is also different and, and that creates some complexity here. So, the advice here as a general advices, but please talk to, your own CPA, of when to buy a car, 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 on the topic of depreciation for clarification of the tax code. have probably about, you know, 500, 600 pages and, and, and believe it or not, this thing is called Quick Finder. 500 page quick finder, shortcut book, huh? Yep. 500 pages of depreciation and code, and that is already quick. So, you know, from time to time, the depreciation of cars using can be pretty complicated.

Evon:

And I, I appreciate both of you coming on and bringing as tax professionals, the reality of the situation, both in terms of how to do it appropriately. But also in terms of the, the actual audit risk, you know, that, that businesses face, it may that change over time, sure. But, but you, you bring the reality to that. So listen to Jackson and Kevin, go talk with your own tax professionals and see what is appropriate for your specific situation. based on your circumstances. And, and with that, I appreciate both of your time. Where can people find you and follow you and learn more about what you're doing?

Jackson:

Yeah. I mean, probably the best way. so our, our website, refractionalcfo.com. if you ever want to hop on put a 15 minute call for us, you know, with us, or if you have a question, you can go there. There's a big button, you click on it, it takes it, takes you to a calendar. You can schedule a 15 minute call with us. and that's probably the easiest way to, talk to

Evon:

Perfect. We'll throw all of that in the show notes as well as past episodes we've done together. So I'll add those into the show notes too. If you have questions, reach out to Jackson, Kevin, and in the meantime, we will catch you all on the next episode. Take care.

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Evon Mendrin CFP®, CSLP®

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