Lawyers travel a lot for work—to courthouses, clients, and more. That is why it makes sense to ensure that you are taking all available tax deductions. However, the rules on which deductions to use when can be somewhat complicated.
When you use your car for business purposes, you can calculate your auto expense deduction on your tax return in one of two ways: the standard mileage deduction or the actual-expense deduction. Each has pros and cons, but if certain procedures are followed you can choose between the two to get the larger deduction. The difference can be substantial, so it is a good idea to have a general understanding of how each one works. In addition, there are special tax deductions and credits available for those seeking to purchase a car in 2016.
Using the Standard Mileage Deduction
The standard mileage rule allows an income deduction for every mile driven for a business purpose. For 2016, it is 54 cents per mile.
What types of trips are considered to have a business purpose? The list is pretty broad but here are a few:
- Driving to meet a client, attending a bar association meeting, or other business-related event.
- Taking the client from the courthouse to the bar to celebrate a win (or not).
- Driving to a temporary work location.
There is one big exception: driving from home to your office (and vice versa) or another regular place of business is considered a nondeductible commuting expense. However, you can get around this exception by setting up a home office as your principal place of business.
The standard mileage rule is generally best for attorneys who work primarily from home and frequently drive to meet clients, go to court, or for other business purposes. Even if you have an office outside of the home, you can still claim the home as a principal place of business so long as you do most of your work there.
If your tax return is selected for an audit, the IRS will ask for a log of the business miles driven or will disallow the deduction. The log must contain the starting point and end point of the trip, the time and date of the trip and the business purpose. In the past, this has been a contentious issue since most people did not keep contemporaneous mileage logs and it was difficult to reconstruct a log years after the fact using appointment books, past receipts and hazy memories. These days, if you use Google Calendar and Google Maps, you should be able to recreate an accurate log fairly easily. Additionally, if you use most major law practice management software programs, you should be able to easily track your trips within the program.
It is permissible to use the standard mileage rule for leased cars. However, most lease contracts only allow between 10,000 to 15,000 annual miles before you incur an extra per mile charge, so leased vehicles may not be optimal for an attorney planning on a lot of travel.
Deducting Actual Expenses
The actual-expense rule allows you to deduct the actual costs of operating the vehicle for the year. This includes maintenance, gas, car loan interest, insurance and registration fees. However, loan principal payments are not deductible.
If the car is used for both business and personal use, the total expense must be pro-rated and reflect only business use. When doing so, remember that, as with the standard mileage deduction, commuting to your regular place of business is considered a nonbusiness activity.
A car can be depreciated but the amount of the depreciation is limited by law in order to limit depreciation of expensive vehicles. As of 2016, the depreciation limits are: $3,160 for the first tax year the vehicle is in service; $5,100 for the second year; $3,050 for the third year; and $1,875 for each successive year.
The actual expense method is recommended for lawyers that do not drive very often or incur high maintenance costs or both. In other words, this is ideal for the driver of a used luxury car after it is out of warranty. Also, this method is recommended for leased cars because most of the lease payments are deductible.
Looking for Special Deductions and Credits When Buying a Car
When purchasing a car, you should always check to see if your car qualifies for certain tax deductions or tax credits. Here are some of the most common ones.
Alternative fuel tax credits. If you purchase or lease cars that use alternative energy such as hybrids, natural gas or electric cars, you may be eligible for a tax credit. The amount of the credit depends on the type of vehicle and whether it is subject to a phase-out.
A tax credit should be distinguished from an income deduction because a tax credit reduces the tax bill dollar for dollar. However, these tax credits are nonrefundable. So if you buy a Tesla Model S and are eligible for the $7,500 tax credit but only have a $6,000 tax bill, you will not get a refund check for the excess $1,500.
Bonus depreciation deduction. According to Revenue Procedure 2016-23, any car purchased and placed in service in 2016 is eligible for a bonus depreciation of 50% of the cost with an $8,000 limit.
Section 179 deduction. Generally, sport utility vehicles and light trucks that weigh over 6,000 pounds are eligible for a very large up-front deduction. The deduction amount tends to vary, so check to see if the car qualifies for the deduction. However, if you claim this deduction, you cannot use the standard mileage method for computing auto expenses.
Whichever method you choose, make sure you are taking full advantage of the credits and deductions available to you.