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Ask Dave

Appreciate Depreciation

As a self-employed person, Doug is beating up his car so much that he may need to switch the kind of depreciation he uses.

QUESTION: Doug is self-employed and travels 30,000 miles a year in his van. He is 3 payments away from it being paid off, but it has 170,000 miles on it. He’s itching for something new. He’s concerned about putting lots of money into it. What does Dave think of buying a new van and having the tax advantages?

ANSWER: There are 2 things you can do on taxes when it comes to your cars. You can straight line depreciate them, which is what you do with an expensive vehicle. The other way is to write the mileage off, and you do that if you drive a lot. You get the mileage if you have debt or not.

Let’s say you bought a $25,000 car. If you depreciate that over 5 years, that’s $5,000 a year. If you make $65,000 a year and take $5,000 on that, you would pay taxes on $60,000. If you didn’t have that, you would pay $1,250 in taxes. You’d be spending $25,000 over 5 years to save $1,250 a year on taxes. You don’t want to make that trade.

Also, whatever you drive, you destroy. You have to think of your vehicle as overhead. You’re going to destroy a $25,000 van or a $5,000 van all in the same period of time. As a businessman, which do you want to destroy? The answer is whatever is the least expensive that gets the job done.