My husband has a small business hauling oil that is called Nomad Trucking. He is the owner-operator and we have no other employees. We are in the process of restoring a '57 Chevy Nomad which is how the business name came about. Is there any we we could write off part of the expenses to restore this car as it will be used in parades/car shows for promotional purposes? It will also be used for personal use at times, but we would have a magnetic decal on the car stating it is for Nomad Trucking.

Hello,

My name is Matthew Greer. I am a CPA licensed to practice in the State of Tennessee.

 

I researched your question and was unsure if the truck is already on the books and fully depreciated and or if you bought the truck and then decided to make improvements. Also, because you will use the truck for personal reasons and not exclusively for business purposes, there are certain rules that must be followed.

 

According to Publication 535, Business Expenses, repairs you make to your business vehicle are currently deductible. However, amounts you pay to recondition and overhaul business vehicles are capital expenses and are recovered through depreciation.

 

This means that the cost of the reconditioning would be capitalized and depreciated over its useful life. In this case, all the costs to recondition the vehicle would be added together to form the basis. For example, the basis would be the cost (less any depreciation) plus improvements.

 

I must note that according to Publication 535, a business expense must be both ordinary and necessary in order to be deductible. It also goes on to say, an ordinary expense is one that is common and accepted in your industry and a necessary expense is one that is helpful and appropriate for your trade or business It goes on to say. In my opinion, fixing up an old truck in order to attend parades/trade shows would be both ordinary and necessary for your business. Because you own a trucking company that transports fuel it is very much likely that potential customers could be at the shows. This could be a great marketing tool and reach people who would otherwise not be reached.

 

When evaluating business expenses, it is very important to distinguish which expenses may be used to figure cost of goods sold, capital expenses and personal expenses. This is important because expenses related to cost of goods sold is deductible this year, capital expenses are spread out over the life of the asset and personal expenses are not allowed as a deduction.

 

Per Publication 463, a major improvement to a vehicle is treated as a new item of 5-year recovery property. It is treated as placed in service in the year the improvement is made. It does not matter how old the car is when the improvement is added. Follow the same steps for depreciating the improvement as you would for depreciating the original cost of the vehicle. However, you must treat the improvement and the car as a whole when applying the limits on the depreciation deductions. Your car's depreciation deduction for the year (plus any section 179 deduction, special depreciation allowance, and depreciation on any improvements) cannot be more than the depreciation limit that applies for that year ($11,260 in 2011).

 

With all this said it is very important to determine how much the vehicle will be used for business vs. personal which is determined by dividing business miles by total miles driven during that period. For instance, if you determine that the total miles driven in the vehicle for the year will be 10,000 and 8,000 is for business purposes and the remainder is personal, 80% (8,000/10,000) would be used to determine business cost and 20% would be used to determine personal cost. Furthermore, if the vehicle cost $10,000, $8,000 is deductible for business purposes and depreciated over the recovery period. According to Publication 535, a major improvement is treated as a new item of 5-year recovery property, therefore, the entire $8,000 is eligible for the section 179 deduction and is less than the depreciation maximum $8,848 ($11,260 x 80%). Typically, $11,260 would be used as the maximum; however, since the truck will be used less than 100% for business purposes, you must multiply the maximum by the business use percentage (80%).

 

It must also be noted that a vehicle must be used at least 50% of the time to be eligible for the section 179 election. If business usage fails below 50%, you cannot elect section 179 but the business portion can still be depreciated.

 

Per Publication 463, if you use your car for business purposes, you ordinarily can deduct car expenses. You generally can use one of the two following methods to figure your deductible expenses.

· Standard mileage rate.

· Actual car expenses.

 

If you use the standard mileage rate you cannot deduct ‘Actual car expenses’ which includes depreciation, lease payments, maintenance and repairs, gasoline, oil, insurance, or vehicle registration fees.

 

Also, per Publication 463, if you want to use the standard mileage rate for a car you own, you must choose to use it in the first year the car is available for use in your business. Then in later years, you can choose to use either the standard mileage rate or actual expenses.

 

I assumed you would be required to use ‘Actual car expenses’ because more than likely you use five or more cars at the same time in your business. If that assumption is true, you would be required to take actual expenses and apply the determined business usage ratio (i.e. 80%).

 

Last but not least, it is extremely important to keep adequate records of business vs. personal usage. You must be able to support your claim of business use or it may cost you if audited.