How to Buy a Car in an LLC

Can you use your car
as a business expense? That’s today’s show. Let’s dive into it. Hey everyone, I’m
Clayton Morris. I’m Natalie Morris. And welcome to the Investing
in Real Estate show. This is the show where
we try to help you build financial intelligence. We use buy and hold real
estate as our vehicle to passive income and
monthly cash flow. But there’s so many different
ways to build cash flow. There’s so many different ways
to lower your taxable base, I guess you could say. And we talk about all of
those different strategies here on the show. And one thing that we
talk about regularly is setting up a business,
right, setting up your LLC, becoming smarter by
incorporating your family. And then there’s so many
expenses as it relates to that. So I want to read a
question, because we got one from a viewer. Jeff Shelton wrote us. He said, “Hi, Clayton. I’d like to submit a
request for your podcast to cover the issue
of a company car and if it’s beneficial
to have a lease or purchase, to pay
monthly or pay it off, and how to write off the
expense for such a car.” Jeff, great question. I’m going to hand
it over to Natalie. And going to go take
a cigarette break. No, you’re not. OK. You’re going to stay right here. OK, so the reason that he says
he’s going to hand it over to Natalie is because I’m the
one who tries to figure out, in our life, can we
legitimately funnel this expense through our business? Now why do we want to do that? Let’s back up just
a tiny, tiny bit. Now obviously, if you own an
LLC inside of your family, right– there’s some kind of
business that operates out of your family– whether you
sell masquerade masks on Etsy, or you own real
estate, right, there is a spectrum of
what you could be doing to make money
inside of your house as a legitimate business. And then what we
do in our house is try to make sure that
what we need in our lives, we can legitimately pay out
of the business expense. So we like to have cell phones. We pay that as a
business expense. That means that
that expense is paid for with pre-tax dollars instead
of post-tax dollars, right? Right. So we do that as much
as we possibly can. We have entire episodes on that. Hopefully this is an
agreed upon value. So now we can talk
about that’s obviously why you want to have a car
as a business expense, right? Right, and I get excited
about this stuff. And by the way, I don’t smoke. But I might start,
because it’s tax time. And you get a little
stressed during that time. But I get excited about these
different expenses that we can write off, whether it’s
your printer in your office, or the computer that you’re
buying for your business, or it’s things that you
might not even think about. Maybe it’s your internet access,
or your newspaper subscription. Right. Because maybe you’re
a blogger, and you write about current
events like we do. We talk about, hey, Amazon
just built this plant, and it’s going to
affect real estate. So if you have a Wall
Street Journal subscription, those things are a
write-off for your business. Because as an
individual, right, if I get paid as Natalie
Morris the lady, and I report those dollars on
my own personal social security number, then I’m going to
get taxed on the total amount of what I’ve been paid. So I make $1,000, I
get taxed on $1,000. But Natalie Morris the LLC,
if that company makes $1,000 but I had $500 in
expenses, well, now I’m only taxed on $500. The expenses lower
your tax rate, right? So you want to make sure those
expenses– you don’t just buy things to lower your tax rate. That is not the way you do it. That frustrates accountants. Like, you get people calling
up, can I buy a computer at the end of the year? Can I do all this stuff? No, no, no, no. But instead, you buy things
that you would want anyway with pre-tax dollars, right? So another– so here’s a funny
little personal share is that I like to have my hair blown out– Yes, she does. –pretty regularly, because
I don’t like to do it myself, and because it’s amazing. I have to hear about her
hair on a regular basis. Yes. She’s like, oh, my hair today– And so obviously, we make
money by podcasting to you. That’s one of our
revenue streams. So before we do these shows,
I go and get a blowout. Now those blowouts last
me several days, right? But I do do it for the show. That is a pre-tax expense. It is allowed. I don’t even know how
that’s possible, number one, that your– a hair
cut or blowout could last multiple days. Because I never wash my hair. So when I wake up
in the morning, my hair looks like a rat’s nest. So if I got it done the day
before, I would wake up, it would be an absolute mess. I’d have to shower and
get it taken care of. We’re totally
off-topic of a car. OK, the point is that my
hair looks nice like this– The bottom line– –because I used
pre-tax dollars. Right, the bottom line
is you can get things that are for your business. If you have to do a photo
shoot for your website, you go and get your hair cut– Right. –those things can be
legitimate business expenses. So begin to brainstorm and
think about those things. So Jeff was brainstorming
about purchasing an automobile. And perhaps if he’s a
real estate investor, or if he owns an LLC, how can he
benefit from purchasing a car? OK, so Jeff is trying to
decide, can my LLC own it, or can I own it, right? Is that the main question? That’s the main part
of the question. Or is talking about
lease versus purchase? Well, both. Where should we go first? OK, well, talk about
the purchase part. So should he, the person,
be the owner of this car, or the LLC be the
owner of this car? OK, your business can buy a car. But you have to prove
that you legitimately need it for business expenses. Now me, what I use my car for– I have a big old family
sedan with three rows, right? And I just do carpool. I go, and I pick up
my kids from school, and I take them to golf lessons,
and that’s about it, right? I don’t run around actually
looking at our properties. So few of our properties are
in the state we live in anyway. I don’t know, I sometimes
go meet with bankers, right? But it would be
really hard to prove that I needed this car
for our business, right? You, on the other hand, you
do go look at our properties. You do go meet with investors
that you don’t otherwise need a car, right? You can’t say, I need a car
to drive to my business, like you have an
office in your town. Because the IRS doesn’t
let you have a car or write off mileage just
for commuting to the office. To the office, OK. That doesn’t count. It has to be trips
that you go on. So if you can
legitimately make the case that you need this
car for your business, you can then buy a car
with your business. Perfect example– Joe
the architect, right, our friend the architect– Yes. –great architect
in Pennsylvania. We met with him this week. And of course, he has to
go around and visit clients all the time. He’s going to sites. We were walking
through the woods, looking at stakes in
the ground, and where this build-out is going to take
place, and all of these things. He’s driving to that location. Right. So that’s a legitimate
business expense. He’s using that car to go
out and scout locations for his architectural business,
meet with clients on their job sites. And therefore, that’s
an easy write-off. Yes, you cannot really write off
a car in this same way if you lease it out, like an Uber
car or a utility vehicle, like a steamroller or
something like that. Those things have
their own rules, right? I mean, you could buy a car to
start an Uber-type business. That’s very different. So you’re saying if I leased a
steamroller for my business– There’s a completely
different set of depreciation rules for that. There’s different– so
we’re talking about car you drive to work. Now there are some tax rules
around luxury vehicle versus, I guess, non-luxury vehicle. Right, regular car. Regular car. Well, in the new
law, full-size trucks are now given an
extra advantage. You can write off 100% of that. I mean, your father, who runs
a large landscaping company, the benefit to him
in this new tax law is phenomenal,
because he’s buying a lot of these big trucks. Now your LLC can go to
the bank and, if it’s an established business, perhaps
either get a loan for that car or buy it outright if
you have enough cash. You also can take your existing
car and gift it to your LLC if you want. That is a capital contribution. And you’ll want to
talk to your accountant about how that works. You don’t really get
reimbursed for it so much. You just say, now the
car is owned by the LLC. But then all of your expenses,
all of your maintenance, your tires, some of
your gas purchases, go on the company credit card,
or the company bottom line, right? You’re paying these things,
again, with pre-tax dollars. So how does mileage
go into this? So mileage is separate than
actually owning a car, right? So you can get the
reimbursement whether or not you have it in an LLC or not. Well, we’re talking about
things you write off now, right? So if you own the
car in your LLC, yes, you are going to write
off the mileage, right? And you’re going to
depreciate the vehicle. Your accountant should be
able to help you do that. You’re going to write off
those expenses, right? So you can just decide
either, I write off mileage– you get a specific– I think, right now, it’s
around $0.54 cents per mile if you’d like to
do it that way– or you can just write
off actual costs like gas bills, tires,
tune-ups, that kind of thing, oil changes. And I know what your– like
for instance, your father, in his company, with these
large, earth-moving vehicles, he made the point that these
things retain their value. So if he’s purchasing
one for, whatever it is, a million dollars, that
the depreciation actually allows him to, when he decides
to sell it 10 years from now, get the full value back,
plus the depreciation from the government. So again, the
government– the tax code is written to incentivize
entrepreneurship and business owners. And so if it’s an
incentive for him to go out and buy a large
thing from Caterpillar Company, right, that helps Caterpillar. It helps the jobs. It helps his company. And then he’s also able to
write off that depreciation. And then it still
retains its value. Right. Now if your employer
owns the car and you use it for company
trips or work trips– again, not commuting
to the office. That doesn’t count. Everyone has to get to work. That’s just– none of us get any
kind of perks for that, right? Yeah, we don’t get a Star Trek
teleporter to get to work. So it’s like you go on
some kind of outing. My first job was as a reporter. And so I would write
down the mileage that I went out on stories
and then send that in. And I would get
a specific amount back on my paycheck every week
when I reported my mileage. So you could do actual costs,
or you can estimate mileage and take so much per mileage. Again, that’s up to you. And you need to work with your
accountant to figure out– usually it’s nominal. You just choose
one or the other. So– All right. –that’s that. So is there any more to this
saga about getting a car? Again, you want to
make sure you’re taking full advantage of depreciation. You want to make
sure that you’re doing the right way of
minimizing– or writing off your expenses, right? And then you want to
make sure that you’ve got really good proof. Because if the IRS came to me
and said, hey lady, all you do is pick up your
kids from school. Why are you writing
off this car? You’d be in some
deep doo-doo, right? So you need to be
able to prove– like with Clayton, again, you
could look at your schedule and say, oh, he does meet
with investors at coffee shops all the time. He does look at
these properties. He otherwise doesn’t need a car. He doesn’t drive to
an office, right? That’s not a part
of your commute. In which case, the
IRS would understand. Right. So make sure you have a
good accounting of it. Because that’s some– one way
the IRS is cracking down– as you’ve listened to Tom
Wheelwright, our accountant, talk about it– have a good record of it. And a little dongle
called automatic, it can plug right into
your car’s dashboard in the diagnostic
port if you go to– I think it’s And it actually will track
your mileage for you. You can tag it in an app with
your smartphone to let it know, hey, this is a business
trip, or this is personal. And then you can actually add
it right to a Google spreadsheet automatically. It does it. So you can track all of that for
free using that little like $25 dongle. There’s little
automated ways to make your life a little bit easier
if you’re an entrepreneur. So– I also keep spreadsheets
for our vehicles. Maybe there’s an app to do this,
but I’ve just always done it. Because when I sell
the car, I want to give the new
owner– instead of just a file of a bunch of stuff, I
give them an Excel spreadsheet. And I just say, here’s the date. And I just have it
organized by date, mileage, and then what was done to it,
whether it got a new tire, or whether it got a 30,000-mile
service, what was there. So I can give them
those receipts. But they don’t want that, right? So keep good
records of your car. And then you won’t have
to do so much digging. It’s just a matter of keeping
a lot of good records. Because OK, here’s a
fun little factoid. People who do business– It’s fun fact time. People who do business
in their own names are much more likely to
get audited than people who do business in an LLC. So you’re doing all of this
in the event of an audit. If you have an LLC and
you’re doing it right, the government thinks,
well, this person’s at least got this far. Probably they’re not doing
some shady stuff, right? So you’re only preparing
for the worst really. I think that tells
you a lot, right? If the IRS thinks that, hey,
if you’re doing business, and you’re just doing
business in your own name– like you’re the
plumber, and I’m writing you a check to Joe
Smith, and that’s it, not Joe Smith LLC,
then the IRS probably thinks, hmm, probably not the
savviest bookkeeping going on at this person’s house. Right. That’s a pretty
interesting insight into the way the
IRS views people that don’t know that they
need to incorporate in order to protect themselves
and do things properly. So there you go, Jeff. I hope that answers your
question about purchasing a car in an LLC. I’d love to hear your
comments in the thread below. Let us know your thoughts. And you can always weigh in
and send us show suggestions if you would like. Thank you so much
for subscribing. Now go out there, take action,
and become an investor, real estate investor. We believe it’s the number
one way to build wealth. We’ll see you next
time, everyone.

About the Author: Michael Flood

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