By: Dr. Jake Latimer — Doctorate in Business Finance
Attorney Mel Practess owns his law firm and uses his personal car, a $60,000 BMW, for business.
He likes the Beamer so much that he buys the same $60,000 model for his wife, Sharpe. Although Mel occasionally takes Sharpe’s car for a spin, he never uses her car for business.
By contrast, almost 90 percent of Mel’s mileage on his own BMW is for business. Of course, he claims deductions for these miles.
Mel has been reading articles from the L & Y Tax Advisors, LLC. Now, Mel thinks that to maximize his deductions, maybe he should use both cars for business.
Can Mel find additional tax deductions by driving both his and Sharpe’s car for business?
A. No, because taxpayers can deduct only one business vehicle at a time.
B. No, because you can’t correctly log business mileage if you use more than one vehicle for business.
C. Yes, as long as Mel drives more miles than Sharpe and the adjusted tax basis of both cars is roughly the same.
D. No, if he uses IRS mileage rates to claim his deductions.
C. Mel can — and should — use and claim business use deductions for both cars.
This real-world scenario illustrates a fundamental but often overlooked principle of business vehicle deductions for married couples: the right to claim deductions is not limited to one vehicle.
But the real question is, when does driving two vehicles for business put more business tax deductions on your income tax return?
Here’s the answer. You will realize more tax deductions when you
- actually use each vehicle for business;
2. drive more miles than your spouse does; and
3. own vehicles that are somewhat similar in adjusted basis (usually you can just think the vehicle cost here).
In this case, Mel satisfies all three conditions, which means he pockets more after-tax cash benefits by driving both vehicles.
Key point. If Mel were single and owned two vehicles, he should drive both for business. But when there’s another driver, you must examine the numbers — and we show you how below.
Why Answer A Is Wrong
In response to the question above, answer A is wrong because the IRS says that claiming deductions on multiple business vehicles is okay. We examine two such indications below.
IRS Publication 463
In this publication, the IRS offers guidance to help you claim travel, gift, and car expenses on your tax return. In its explanation of the rules on using the standard mileage rate to deduct your car use, the IRS includes the following example:1
A salesperson owns three cars and two vans that they alternate using for calling on their customers. They can use the standard mileage rate for the business mileage of the three cars and the two vans because they don’t use them at the same time (emphasis added).
You can clearly see that the IRS allows you to use more than one vehicle for business.
IRS Form 4562
The second source of evidence of IRS approval of deductions on more than one business vehicle comes from IRS Form 4562, in which the IRS provides space for six vehicles used by proprietors, partners, and other more-than-5-percent owners.2
What the Courts Say About All This
Acceptance of the multiple-vehicle strategy has come not just from the IRS but also from the courts. In at least three cases, the Tax Court has upheld a taxpayer’s right to claim business deductions on more than one vehicle during the same tax year.
What Court Said
IRS allocates mileage between business use and personal use on three different cars during the same tax year.
Court has no problem with and actually relies on the allocation to decide this case on other grounds.
World of Service4
Nutrition consultant claims deductions for business use of three cars during the same tax year.
Court okays deductions for 50 percent of gas, repairs, depreciation, and maintenance for each car.
Horse breeder claims depreciation on five vehicles in Year 1 and six in Year 2. Court has no problem allowing depreciation of each vehicle but cuts amount of allowable depreciation for lack of documentation.
Why Answer B Is Wrong
In response to the question above, answer B is wrong because you can track the business mileage of more than one vehicle — either in a single log or in separate ones for each vehicle.
Why Answer D Is Wrong
Answer D is wrong because Mel would accrue significant tax savings by using the two-car strategy with or without the use of IRS mileage rates. Why? With mileage rates, you depreciate the vehicle and have a gain or loss on sale. The IRS built depreciation into the mileage rate.
Consider the following example that calculates the deduction benefit from depreciation only. You get the same net increase in depreciation benefit from either the IRS mileage rate or the actual expense method.
Before — Driving One BMW
Mel and Sharpe have an adjusted basis of $60,000 in each of the BMWs. Mel drives his BMW 93.3 percent for business (28,000 business miles versus 2,000 personal). Sharpe drives her BMW 8,000 miles, all personal.
Maximum depreciation and/or Section 179 deductions: $55,980 (i.e., 93.3 percent of $60,000 on Mel’s BMW).
After — Driving Both BMWs
Mel switches cars with Sharpe each week. He now has 73.7 percent business use on his BMW and 73.7 percent business use on Sharpe’s BMW (28,000 business miles ÷ 38,000 total miles).
Maximum depreciation and/or Section 179 deductions: $88,440 (i.e., 73.7 percent of $60,000 on Mel’s BMW plus 73.7 percent of $60,000 on Sharpe’s BMW).
Bottom line. Using the two-car strategy netted Mel $32,460 in new possible deductions ($88,440 instead of $55,980). And he didn’t have to spend extra money or drive additional miles to do it. All he had to do was know the rules!
Note that we said “possible deductions.” Why? Because the final number depends on the sales prices of the BMWs, which offsets the depreciation. But for sure, Mel and Sharpe come out ahead with the two-car strategy.
Primary point. The IRS does not restrict taxpayers to claiming deductions on just one business vehicle. They can potentially maximize their tax benefits by utilizing more than one vehicle for business purposes, especially when they:
·Use each vehicle predominantly (more than 50 percent) for business.
·Drive more business miles than their spouse.
·Own vehicles with closely aligned adjusted bases.
IRS’s stance. IRS Publication 463 and IRS Form 4562 show that you can claim deductions for business usage on more than one vehicle.
Case law. Multiple court rulings have also supported taxpayers’ rights to claim business deductions on multiple vehicles in the same tax year.
Benefits demonstrated. By strategically using two cars for business, Mel increased his potential deductions significantly without incurring additional costs or driving more miles. This is a viable strategy when you meet the criteria, as evidenced by Mel’s example, where he potentially netted an extra $32,460 in deductions.