If you drive a personal vehicle for your property management business, you’ll need to understand how the Tax Cuts and Jobs Act (TCJA) will impact your 2018 mileage deduction. While Congress passed the bill last December, the changes only went into effect on January 1, 2018 and do not affect your 2017 taxes. As part of our series on tax regulations, we get into the nitty gritty of mileage deductions to keep tracking and reporting your resources on the road efficiently.
Before 2018, employees who incurred out-of-pocket expenses to perform their jobs could claim a deduction as long as expenses were not reimbursed by their employer. This was a miscellaneous itemized deduction, meaning it could be claimed only by taxpayers who chose to itemize. Also, such expenses were deductible only if, and to the extent, they exceeded 2% of the employee’s adjusted gross income. By far the most common unreimbursed employee expense was job-related mileage (not including personal commuting). Other deductible unreimbursed expenses included long-distance travel expenses, continuing education expenses required for present employment, job search expenses for the same occupation, work-related dues and subscriptions, depreciation on a home computer used for work, and home offices used for the convenience of the employer. In 2015, 14.6 million taxpayers claimed this deduction, for a total of more than $96 billion.
The TCJA eliminated this deduction entirely starting in 2018 and continuing through 2025. This means that if you’re an employee who drives for work you may not deduct any of your car expenses on your personal tax return.
You should seek to have your employer reimburse you for your work-related mileage. You can use the standard mileage rate—54.5 cents per mile in 2018—to calculate your reimbursements. Such reimbursements are tax-free to you, the employee, so long as you adequately account for your mileage and also tax deductible by your employer. If an employee drives his or her car a lot for work, it could be worthwhile to accept a salary reduction in return for such reimbursement. Tax must be paid on salary, while the reimbursements are tax-free.
Alternatively, an employer can provide an employee with a company car, which would be tax free if the employee only uses it for work-related driving (not including personal commuting).
You will discover creative ways to identify and eliminate routines that are no longer benefiting your business.
If you’re self-employed, you may continue to take a business deduction for the business use of your personal car. This was not eliminated like the employees deduction: it was enhanced. It helps to first know that the annual depreciation deduction for automobiles is subject to a maximum annual dollar limit. The TCJA greatly increases the annual limits for passenger vehicles first placed into service in a business during 2018 and later. The amounts are shown in the following chart and they apply to all passenger vehicles, including automobiles, trucks, and vans that fall within the definition. The chart shows that if you place a passenger vehicle into service in your business in 2018, you may take a maximum depreciation deduction of $10,000. The second year, you may deduct a whopping $16,000. That’s $26,000 in depreciation deductions in the first two years–$34,000 if bonus depreciation is also claimed. These are by far the highest annual limits for passenger vehicle depreciation that have ever been allowed!
It’s important to note that this chart assumes 100% business use of the vehicle. If you adopt the vehicle for both personal and business purposes, the limits are then reduced by the percentage of personal use. For example, if you use the vehicle 40% of the time for personal use, your annual deductions are consequently reduced by 40%. Additionally, you receive no bonus depreciation unless you use the vehicle at least 51% of the time for business and you must continue to do so for the first six years you own it or be required to give back part of your deduction. Moreover, your actual depreciation deduction, up to the annual limit, depends on the cost of your car and how much you drive for business.Unfortunately, if you purchased your car and placed it into service during 2017 or earlier, you can’t benefit from these new limits and you’re stuck with those that applied before. For passenger automobiles placed into service during 2017, only $3,160 could be deducted in 2017 and $5,100 in 2018.
To claim the depreciation deduction for an automobile, you must use the actual expense method to calculate your annual mileage deduction, not the standard mileage rate. With the actual expense method, you are required to keep track of what you spend on gas and other car expenses and deduct that amount each year. The standard mileage rate is simpler because you deduct a set amount for each business mile (again 54.5 cents) instead of your actual itemized expenses. When you use the actual expense method the first year you own a vehicle, you won’t be allowed to ever use the standard mileage rate for that same vehicle. However, depending on the cost of your car and how much you drive for business, the substantial depreciation you can now claim may make it worthwhile to use the actual expense method.
Now that you’ve learned all about how the 2018 mileage deduction has evolved, we hope that it will help you work with your accountant to determine the best course of action for your property management business. For an overview of the 2018 tax regulations, check out our post: How does the new tax law impact property managers? 9 changes to be aware of.