Entrepreneurs are always looking to earn a profit in their business while reducing their taxable income. During the “Assets Over Liabilities” panel at the Sept. 24-25 Revolt Summit x AT&T, music mogul Master P provided some answers by sharing the importance of possessing credit and knowing how to use business deductions to grow business wealth strategically.
“Well, I am going to tell y’all something that might make a lot of sense that they don’t teach us — credit is so important. I want to show y’all that you might want that nice car, but let’s buy that car if it’s over 6,000 pounds, and let’s put that car in a company’s name or an LLC, so we can write it off and get that car for free,” Master P told audience members. “You can get whatever car you want. Say, for instance, it’s a [Mercedes] Benz [or] it’s a Cadillac — it [doesn’t] matter. You can write these cars off.”
Are Car-Related Expenses Tax Deductible?
While this idea seems incredibly easy, an entrepreneur’s car payments are not actually free, of course. But sometimes all car-related expenses can be tax deductible, experts say.
Tax preparation specialist Eboni Coons, founder of Taxes by Eboni, LLC, recently shared her insight with Finurah concerning business deductions related to car expenses.
Can A Car Really Be Free?
Vehicles may qualify for a tax deduction under Section 179 of the IRS tax code related to depreciation. If the vehicle is over 6,000 pounds, is necessary for business, and used solely for business purposes, it can be written off as a business expense.
“People buying vehicles for their business are to haul people or things,” Coons said. “A caregiver might need a van or a construction company might need a truck or even landscaping companies need trucks to take that equipment with them.”
In addition to these examples, some business owners purchase luxury vehicles that are over 6000 pounds if it is aligned with their brand.
“If you are a life and branding coach, it makes sense for you to have a luxury vehicle. How can you attract the type of client you want?” Coons added. “But again, there’s stipulations to that too because the IRS has to deem it necessary in an ordinary expense in order for you to write it off too.”
Not Free, But Here’s A Few Car-Related Deductions
Writing off a car as a total deduction is only for a select group of business owners. But for others, who use their personal cars to manage or operate their business, there are still deductions that can be taken, Coons said.
For businesses that do not qualify for a full deduction, there are still expenses that can be written off, Coons said. The three M’s — mileage, maintenance and meals — are all expenses associated with business and driving that are easy to track and can be deducted.
In addition, even if an entrepreneur’s car is not used solely for business, a percentage of the insurance can be deducted. An accountant or tax preparer will best support business owners in identifying the most accurate percentage.
Avoid An IRS Audit
One of the greatest reasons the IRS audits a business owner: claiming 100 percent of business use of a vehicle.
“The more you document, the easier it is to write it off,” Coons said.
Use recording-keeping apps for mileage and save your receipts for maintenance and meals purchased while doing business, Coons said. In addition to keeping clear records, ensure that your business expenses match your income.
“You can’t get a brand new vehicle, and you have no business income,” she said. “When you are writing off, you have to be earning. Otherwise, it is a red flag.”