Doctors love their cars. It’s not surprising then that doctors often ask how their cars can provide an income tax benefit. The answer, of course, depends on a variety of factors such as business use, the method elected for deducting car expenses and the type of entity used for medical operations.
The first thing to keep in mind when deducting car expenses is that only the business use portion qualifies for an income tax deduction. Personal use, including commuting to and from work is, nondeductible. The business use is calculated by tracking mileage. When tracking mileage, a log of the personal and business use is essential. This could be accomplished by using an old-fashioned method such as a paper log or by using a newer hi-tech app (e.g., MileBug). Whatever method is chosen, it is important to note that the log should be kept contemporaneously with the use of the car.
There are two methods that taxpayers can use for deducting car expenses: 1) the standard mileage rate and 2) actual expenses. The standard mileage rate is a straightforward and simple approach. Multiply business miles by the standard rate established by the IRS (54 cents per business mile driven in 2016). For example, if you had 2,000 business miles, the associated tax deduction would be $1,080 (2,000 miles x $0.54/mile).
The actual expense method involves a bit more work. You multiply the total of your car expenses such as gasoline, oil changes, car repairs, and depreciation by the business use percentage. You can elect to apply either method for each automobile. However, once you choose a method, you must continue to use the same method each year for that automobile.
Doctors operating under a professional association (a corporate tax structure) will typically get reimbursed for business miles using the standard mileage rate. This results in the medical practice receiving a deduction for the business miles and the doctor receiving a nontaxable reimbursement. Unreimbursed business miles can still be deducted by the doctor as employee business expenses on the doctor’s personal tax return. However, the deductions are severely limited and often result in no tax benefit.
Doctors working as sole proprietors or under a professional limited liability company (as a partnership tax structure) will be able to directly offset car expenses against the earnings of their share of the medical practice. This will generally afford more opportunity to use the actual expense method. The actual expense method can often result in large deductions in the initial year after the purchase of a car (especially certain sport utility vehicles [SUVs]). SUVs with a gross vehicle weight rating in excess of 6,000 lbs. qualify for a $25,000 initial year deduction under Sec. 179 in addition to regular depreciation expense.
For example, a new SUV costing $60,000 that was used 100 percent for business purposes could generate a $46,000 deduction in 2016 ($25,000 Sec. 179 + $17,500 bonus depreciation + $3,500 regular depreciation). While a deduction like this can be highly beneficial, it should be emphasized that in the example, the vehicle was used 100 percent for business purposes, a difficult percentage to achieve. If the business use were reduced to 80 percent, the corresponding income tax deduction would be reduced by $9,200 or 20 percent. Also, if the business use of the vehicle drops to 50 percent or less in a subsequent year, a portion of the $25,000 Sec. 179 deduction may need to be recaptured as income in that year.
A car can provide valuable income tax deductions to doctors and medical practices. Before proceeding, however, a number of factors should be considered in maximizing the income tax deduction based on the particular circumstances while still allowing for enjoyment and practical use (personal or otherwise) of the car.
Bennett Allison, CPA, CFP™ is a shareholder at Sol Schwartz & Associates PC (firstname.lastname@example.org). He has over 20 years’ public accounting experience serving individuals, corporations, S-corporations, partnerships, trusts, estates and nonprofit organizations. In addition, Bennett works with a high concentration of physician practices and high-net-worth individuals. Contact Bennett at email@example.com or 210-384-8000, ext. 138.