You should be receiving a tax deduction for your vehicle, right? To maximize that deduction, that means you need a large, heavy SUV or truck…something to do with Section 179, right? Some of the most common questions faced by business owners and tax professionals surround auto deduction. This post aims to discuss the factors to consider, specifically in the context of a physician-owned medical practice.
Step 1: Understand the Rules
In the world of tax-deductible auto expenses, the business owner first needs to make a distinction between “commuting” miles and “business” miles. Auto expenses tied to commuting miles are never deductible expenses. Commuting miles are most easily defined as the miles driven between your primary residence and your primary place of business (e.g. the main office, or hospital). Defining business miles can be nebulous as there are so many different ways that business miles are accrued. The most common examples that we see are trips to a satellite office from the main office, trips to the hospital, trips to meet a colleague or vendor for dinner, etc.
You may have heard that the solution to the commuting miles problem is to use your vehicle as an advertisement by sticking your practice information onto the vehicle with a magnetic sign or lettering on the window(s). While you can deduct the cost of the sign or lettering expense, the IRS has successfully argued in court that adding advertisement information to a vehicle does not convert all miles driven into business miles.
Step 2: Understand the Risks
Often, owner-physicians consider purchasing a vehicle as a business vehicle, making the purchase under the practice name and using the practice finances. While there are some scenarios where this can make sense, we have found that in many cases, the risk outweighs the tax benefit. Oftentimes, key questions need to be asked first:
- Does the state in which the practice is domiciled require commercial insurance for a practice/business-owned vehicle?
- Does a policy need to be written to define which employees have access to a practice/business-owned vehicle?
- If the practice/business-owned vehicle were to be involved in an accident, what practice assets would be implicated? Is A/R on the table for any potential lawsuit?
Step 3: Understand the Options
To defray the risk of coming across as a stodgy tax professional, there certainly are legitimate ways to capture the expense of business miles. We believe that the best practice, in most cases, is to implement an auto mileage reimbursement policy. A log of business trips taken can be maintained that allows the owner-physician to receive a reimbursement check from the practice, paying for the expense of operating a vehicle for business purposes using the IRS-published standard mileage rate(s). Implementing a sound reimbursement policy can help defray the risk of a practice-owned vehicle while providing a tax benefit for the practice and owner-physician.
IRS rules surrounding auto expenses are onerous, if you’d like to discuss your specific circumstances, please reach out to a DoctorsManagement tax professional and we will be glad to discuss with you.
