 Income tax 2022-2023, business expenses, car and truck expenses. Let's do some wealth preservation with some tax preparation. Most of this information comes from the Tax Guide for Small Business for Individuals Who Use Schedule C, Publication 334, Tax Year 2022. You can find on the IRS website, irs.gov, irs.gov. Looking at the income tax formula, we're focused on line one, that being income. Remember, in the first half of the income tax formula is in essence an income statement, but just to outline the scaffolding, other forms and schedules flowing into it, one being the Schedule C, in essence an income statement in and of itself, it having business income minus business expenses. The business net income rolling into line one of the income tax formula here, that being income. First page of the form 1040, noting that the Schedule C rolls into the Schedule 1, which would roll into page one of form 1040, line number eight. Schedule C, profit or loss from business, noting it is an income statement in it. Support Accounting Instruction by clicking the link below, giving you a free month membership to all of the content on our website, broken out by category, further broken out by course. Each course then organized in a logical, reasonable fashion, making it much more easy to find what you need than can be done on a YouTube page. We also include added resources such as Excel practice problems, PDF files and more like QuickBooks backup files when applicable. So once again, click the link below for a free month membership to our website and all the content on it. Essence with income minus the expenses. We're focused on the expenses side of things here. This time focused on the car and truck expenses. One which often is another wrinkle, another area of difficulty for multiple different reasons. One is going to be because you might have cars and trucks that are personal versus a business. You might be using some personal and some business. We need to break out from business and personal as we have seen in a prior presentation. That's the general concept we need in order to be deducting because it needs to be ordinary and necessary for business to be deducting on the Schedule C. We also have different methods for tracking the use of an automobile. We can track the actual expenses in which case we have to have the added burden of putting on the books as an asset and depreciating it, having limitations possibly on the type of depreciation methods for automobiles and whatnot and then track all of the expenses related to the automobile trying to break out between business and personal and or we might have a more of a simplified method which would be a mileage type of method which would be easier because normally we would track just simply the miles in that case and then there's a question of well which method would result in more of a deduction which is more of a complicated question than you might think because we could think about that question as of the deduction for this year versus the deduction over the life of the automobile used in the business because then that leads to the question of if I choose one method or the other am I locked into choosing one method or the other or are there instances where I can change methods we know that the general rule for accounting methods is that the IRS likes you to stick to a method once you have that so you might have restrictions then to go back and forth between methods for tracking the car and truck expenses okay that said if you use your car and truck in your business you may be able to deduct the costs of operating and maintaining your vehicle because it is a business expense you would think you may also be able to deduct other costs of local transportation and traveling away from home overnight on business so there becomes this kind of issue in terms of what is constituting traveling and they have this overnight type of thing there to help us with that categorization that you might dive into in a little bit more detail in future presentations so local transportation expenses include the ordinary legume and necessary costs of all the following ordinary and necessary being those key terms for a business expense in general so getting from one workplace to another in the course of your business or profession when you are traveling within the city or general area that is your tax home so it is not transportation away from your general vicinity you are moving around your general vicinity but notice you are going from one workplace to another not from your home to your primary workplace which might be categorized as commuting so tax home is defined later so visiting a client's customers so if you are visiting your customers then you would think that would be ordinary and necessary going to a business meeting away from your regular workplace and then getting from your home to a temporary workplace when you have one or more regular places of work so notice all of these kind of revolve around non-commuting miles commuting being going from home to your normal workplace and the idea would be that normal people don't get commuting deductions like if you have a W2 job so that would be like they are trying to say commuting may not be part of the ordinary and necessary and all these other stuff then would be so these temporary workplaces can be either within the area of your tax home or outside that area so now we have got these definitions that come into place what is my home and what is my workplace so that I can determine if I am doing a commuting situation or a non-commuting situation and if I am in the general facility of my workplace or if I am outside of it doing travel possibly okay so local business transportation does not include expenses you have while traveling away from home overnight so those expenses are deductible as travel expenses and are discussed later under travel and meals so that's kind of the definition you are overnight traveling so still may be deductible but most likely are if they are for business but they are going to be under travel and meals where you have slightly different kind of rules and what not with regards to them then here so however if you use your car while traveling away from home overnight use the rules in this section to figure your car expense deduction so we are going to use the methods here which we will talk about shortly to figure the car expense deductions for the travel too so generally your tax home is your regular place of business regardless of whether you maintain your family home it includes the entire city or general area in which your business or work is located so let me jump to this traveling thing one more time obviously if you are traveling away from the general facility your general area then your travel expenses might not be your car you know you have travel of the air and what not taxing what not but if you are using your car while traveling away from home overnight so use the rules in this section to figure your car expense deduction ok example you operate a printing press out of a rented office space you use your van to deliver completed jobs to your customers so you can deduct the cost of round trip transportation on between your customers and your print shop so you are at your shop that is where your work is you are going to your customers driving to the customers of course I think it would be a deductible transportation thing driving your car over there so caution you cannot deduct the cost of driving your car or truck between your home and your main regular workplace this is where it becomes messy because that is the commuting miles so when you are trying to figure out the actual costs it becomes difficult to do that because now if you are filling up your tank for example then it is kind of difficult to say well I am filling up my tank but I am not going to count the costs that were related to the commuting or my personal travel versus my business travel you see where that can get messy it can get a little bit easier to do that if you have a mileage kind of method because then you can try to determine the mileage that you used for the commute versus the mileage that you used for the business so these costs are personal it is personal commuting expenses which aren't deductible office in the home so your workplace can be your home if you have an office in your home that qualifies as your principal place of business so now we have got this idea of a principal place of business as a sole proprietorship well what if that is my home because my home is the office so for more information you can see business use of your home later to determine if the home is an office so example so you are a graphic designer you operate your business out of your home your home qualifies as your principal place of business you occasionally have to drive to your clients to deliver your completed work you can deduct the cost of the round-trip transportation between your home and your clients so now you are driving from your home to somewhere else which you might think would be a commuting thing personal versus a business expense but it is not because now your home is your principal place of business so if you are driving to your client from your home you would think that that would be a business deduction because your home is your office methods of deducting car and truck expenses so for local transportation or overnight travel by car or truck you can generally use one of the following methods to figure your expenses you got the standard mileage rate and then we have got the actual expenses so you can try to track the actual expenses as we saw there are some complications to try to parse out the business versus the personal with regards to trying to track your gas and all that kind of stuff versus the standard mileage rate which of course would be a little bit easier but you still need to track your mileage and then of course there is a question of which of these two would be most beneficial not just in the first year but in years going forward as hopefully the business continues and you use your automobile within it so standard mileage rate so you may be able to use the standard mileage rate to figure the deducting costs of operating your car, van, pickup or panel truck for business purposes the business standard mileage rate for January 1st, 2022 to June 30th, 2022 is 85.5 cents per mile the business standard mileage rate from July 1st, 2022 to December 31st, 2022 is 62.5 cents per mile so it is half the year and half the year that is a little bit messy to calculate but not too bad noting and remembering that these rates are different when you think about a standard mileage rate for the business use than other things you might use a standard mileage rate because they are different parts of the code for example medical mileage rate for driving your car for medical purposes on the Schedule A deduction or charitable contributions may have similar kind of concepts of a mileage rate amount because sometimes those other ones aren't keeping up with inflation to the same degree caution if you choose to use the standard mileage rate for a year you cannot deduct your actual expenses for that year except for business related parking fees and tolls so in other words if you are using the mileage rate you can't also deduct for example the gas you may be able to still deduct the parking fees and tolls but you are quite limited you can't do both otherwise you would be double dipping if you deducted like gas and the mileage rate so choosing the standard mileage rate if you want to use the standard mileage rate for a car or truck you own you must choose to use it and the first year the car is available for use in your business here we come with the restrictions in terms of the IRS wanting some consistency in the methods being used in later years you can choose to use either standard mileage or rate or actual expenses so no one reason for that might be like they are basically saying once again if you want to use the standard mileage rate for a car or truck you own you must choose it and the first year the car is available for use in your business and so that means you can't use the direct write off method and then switch to the mileage method after that first year of business and one reason that might be is because you can imagine in these situations where they have these accelerated depreciation methods which may be limited for an automobile but like a 179 deduction you're already using a double declining balance for depreciation of the car which is a front loaded depreciation more depreciation at the beginning than the end of the life and special depreciation methods you can imagine people would want to then in the first year of operations take that accelerated depreciation and then switch over to the mileage method which might be higher after the depreciation has already been consumed in the first year with these accelerated depreciation methods you can imagine that's probably what they're trying to avoid happening here saying no you can't do that you have to if you want to use the mileage method you've got to use it you've got to use it starting from the first year that means that you might come out to a situation where the actual method is higher than the mileage method in the first year possibly because of accelerated depreciation but you also want to think what's going to be the best method over the life of the vehicle which can be a little bit more confusing to calculate when you're trying to determine which method to use in any case if you choose to use the standard mileage rate or you lease you must use it for the entire lease period now we're talking about a leasing situation including renewals so standard mileage rate not allowed you cannot use the standard mileage rate if you one operate five or more cars at the same time so now you're not using like your your car you got five or more in operation so they're going to say hey you need to not do the standard mileage rate in that case two claim a depreciation deduction using any method other than straight line so for example the the acres and the makers and notice the straight line would be a depreciation method where you're allocating like a like the same amount of depreciation over a certain time frame usually people use like a makers which is an accelerated time frame and again the idea would be that if you use an accelerated depreciation they're concerned that you're going to be overstating the depreciation one year getting a big expense and then switching to the mileage method so you kind of double dipping that's kind of the issue so three claim a section one seventy nine deduction so that's the same issue I was talking about why you can imagine they would they would limit that because if you were able to take a one seventy nine deduction which is an accelerated depreciation in year one and then switch to a mileage method after that then you would have got this big deduction in year one because they accelerated the depreciation so you would think they wouldn't want you to do that claim the special depreciation same thing that's a huge lump sum depreciation in the first year five claimed actual car expenses for a car you leased or six are a rural mail carrier who received a qualified reimbursement so that's kind of a more specialized area for you rural mail carriers out there parking fee but obviously if you got reimbursed you know that would you got reimbursed so you would think that it wouldn't be an expense because you got so parking fees and tolls in addition to using the standard mileage rate you can deduct any business related parking fees and tolls parking fees you pay to park your car at your place of work are non deductible commuting expenses so actual expenses if you do not choose to use the standard mileage rate you may be able to deduct your actual car or truck expenses tip if you qualify to use both methods figure your deduction both ways to see which gives you a larger deduction so that might happen for example in the first year of you putting the car on the books you want to figure which would be better but remember it's not just the first year you're dealing with because you're kind of locked into the methods at least to some degree that you're going to pick so you want to think about you know multiple years what's going to be best actual car expenses include the cost of the following items so if you're doing the actual expenses instead of just using the mileage rate where you would ask someone for their total mileage miles and so on and in essence multiply that times the rate we have to get all the actual stuff which is depreciation which means we have to put the car on the books as a fixed asset and use depreciation methods to depreciate you got the garage rent gas insurance lease payments licenses oil parking fees registration repairs tires and tolls all this car related stuff so if you use your vehicle for both business and personal purpose you must divide your expenses between business and personal use that's where it gets messy so you can divide your expense based on the miles driven for each purpose so you could take like a ratio of some kind you're going to say well I drive my car you're going to look at your total expenses and say well I drive my car 80% business or something like that and it's usually not going to be perfect because you're trying to estimate and it's difficult because you use it for personal and you use it for business you commute as well as use it for other things example example example you are the sole proprietor of a flower shop you drove your van 20,000 miles during the year 16,000 miles were for delivering flowers to customers and 4,000 miles were for personal use including commuting miles so you can claim only 80% which is the 16,000 divided by the total miles of 20 of the cost of operating your van as business expense so when you're trying to do this as a tax repairer you're often going to have to work with clients to get these numbers and be like well what do you think the total what are the total miles that you drove on the year you know and how much of that well how many of those miles do you think are going to be how much of those miles are business miles and you want to be able to track this and of course document it as well as you can because these deductions are going to be a big deduction often time so if you had an audit you'd most likely be talking possibly about car and auto because those are some of the big items so you want to get it as accurate as you can but obviously we are using an estimate which is inherently going to have some estimation in it so more information for more information about the rules for claiming car and truck expenses you can see publication 463 I'll reimbursing your employees for expenses you can generally deduct the amount you reimburse your employees for car and truck expenses as well the reimbursement you deduct and the manner in which you deduct it depend on part in part on whether you reimburse the expenses under the accountable plan or a non-accountable plan so notice that if you have employees then if they are driving their car and truck expenses and you reimburse them for the car and truck expenses then that could be like a benefit in some ways instead of giving them a payment and calling it like W2 wages where you'd have to be dealing with where you'd have to be dealing with self-employment tax and all that kind of stuff so the reimbursement method could be good because you're providing the car or you're reimbursing them for that and if you can give them a payment for the use of their car and whatnot without having taxes applied to it that would be a favorable thing for them and therefore a favorable thing for you as a business but you gotta make sure that you do that in a plan that is appropriate that's a qualified plan so expenses under an accountable plan or a non-accountable plan so for more details on that if you wanna dive into that in more detail you can see chapter 11 of publication 535 that chapter explains accountable plans and tells you whether to report the reimbursement on your employee's form W2