Auto Repair Shop Tax Deductions for Mechanics
Mechanic tax deductions allow auto repair shop owners to reduce their income tax bill and keep more of their hard-earned revenue. It’s important to understand the available tax deductions and how to apply them to make sure you’re deducting everything you can.
Many businesses miss out on some of the tax deductions available to them due to a lack of up-to-date knowledge. A tax professional can help your business identify deductible business expenses and help you optimize your tax bill.
How Do Tax Deductions Work in Auto Repair Shops?
A tax deduction is a business expense you can claim to lower your taxable income, saving you money on taxes. For instance, if your auto repair shop brings in $100,000 but spends $25,000 on equipment, the business is only liable to pay tax on the remaining $75,000.
The IRS allows businesses to write off various expenses as tax deductions. To optimize your tax savings, you need to know which expenses are eligible. These may include:
Start-up costs for new businesses
Office expenses
Meeting and entertainment expenses
Interest on credit
Advertising expenses
Any charitable contributions your business makes
Apart from generic tax deductions that all businesses can take advantage of, there are some tax deductions that auto repair shops specifically can benefit from.
How Does Being Self-Employed Affect My Tax Return?
If you're a self-employed mechanic or receive 1099-NEC forms, you will need to report your income and expenses using Schedule C (Form 1040). To deduct expenses on Schedule C, the expenses must be necessary and ordinary for your industry. You will also need documentation to back up each expense you plan to claim as a deduction. Diligent auto repair shop bookkeeping helps immensely with this.
Top Business Expenses that Mechanics Can Write Off
There are various tax write-offs that your business can take advantage of to reduce your tax bill. Though these tips can be used as a starting point, a small business tax professional can help you identify other deductions that might be available to your business.
1. Vehicles or Equipment Purchased
Depending on the value and lifespan of vehicles and equipment purchased for business use, you can either deduct the full cost of these items or claim the annual depreciation deduction of the same items. You can also deduct the amount you spend paying people to take care of vehicles owned by your business, such as those who perform maintenance or repairs. This also applies to equipment or tools that you need for your business.
Note: Be sure to keep meticulous records of all expenses related to your business so you can claim the correct amount and provide the IRS with proof in the case of an audit.
How Section 179 Applies to Auto Repair Shops
Section 179 gives business owners the chance to save money in the first year a piece of equipment is put into service by writing off the entire cost of the equipment, vehicle, or other asset in one go instead of depreciating it over several years.
If you require vehicles for your auto repair shop, there are strict regulations on which vehicles are covered. Generally, vehicles will be judged on their weight, cargo capacity, or the special-use function of the vehicle when determining whether or not they are eligible for a Section 179 deduction.
2. Software Related to Inventory Management
Managing inventory is an important part of the smooth running of an auto repair business. Though keeping track of inventory isn't required by the IRS, it can be beneficial for your business as it can help streamline your operations and improve efficiency as you know what you have available and what you need to order. It may also make accounting easier during tax season.
Generally, software will qualify for write-offs if it is normal or common in your industry and if it is necessary to run your business. However, depending on how much you spend on software, your deductions will be different. If your software costs more than $2,500, the costs will need to be depreciated over time. You can deduct software costs up to $2,500 as a business expense under the de minimis safe harbor election.
Because deductions can get complicated, it’s helpful to consult a tax professional who can take you through the regulations that apply and help you decide which deduction methods would be most beneficial for your business.
3. Specialized Tools or Equipment
You may be able to depreciate the costs of equipment that is necessary for your business if it fulfills the IRS's qualifying conditions. You can depreciate equipment purchased for your business if:
The property is your own.
It's used in your business.
You can determine its useful life.
You expect the equipment to last for more than a year.
It isn't exempt property as defined in Publication 946.
Safety Equipment
As a mechanic, protecting yourself must be a top priority. You may need a range of safety gear such as hard hats, steel-toed boots, goggles, and gloves to provide a safe working environment. Safety equipment is tax-deductible.
Uniform Costs
Work clothes can be tax deductible, but are subject to some regulations. You can generally write off work clothes or uniforms if:
Your employer requires you to wear them.
They can't be worn outside of work as regular clothes.
They are branded with your company's logo.
Other Deductions
Many other deductions can help you reduce your tax bill. Though these aren't exclusive to mechanics, they can help you reduce your taxable income.
Professional Memberships
Professional memberships are usually tax-deductible as long as the organization's primary purpose is professional and the organization is related to your line of work. Examples include dues to trade organizations and trade unions that meet IRS guidelines.
Organizations whose main purpose is for socializing or networking typically won't qualify for tax deductions. Tax professionals can advise you if your memberships are or aren’t eligible for a deduction.
Licensing and Regulation Fees
Some states may require you to hold a professional license to work as a mechanic. If this is the case, you can deduct the cost of the license.
Insurance Premiums
If you maintain "ordinary" insurance for your business, you can deduct the premiums. You may be able to deduct:
General liability insurance: This protects your business if an employee accidentally causes property damage or injury to a third party.
Workers' compensation insurance: This covers medical expenses and lost wages if employees get sick or injured as a result of their work.
Professional liability insurance: This covers your business against accusations of negligence, business errors, or missed deadlines.
Commercial property insurance: This protects your shop space in the case of damage, theft, vandalism, fire, or anything else that could cause a loss. If you operate your business on your own residential property, you can claim the applicable portion of your rental or homeowners insurance as a deduction.
Business interruption insurance: This covers your business from a loss of trade due to disasters. This type of insurance could be particularly useful in businesses in hurricane-prone areas such as Jacksonville, Florida.
Self-employed health insurance: Health, dental, or long-term care premiums may be deductible if you meet certain criteria.
Optimize Your Tax Return This Tax Season
Whether you're an established auto repair shop owner or have just started working as a self-employed mechanic, many tax deductions can work in your favor. Being aware of the deductions available to you is the first step in getting the most out of your tax return.
Because navigating the tax system can be confusing, arduous, and time-consuming, working with a tax professional is the best way to save time and potentially cut your tax bill. Consult a tax planning expert to see how your auto repair shop business can benefit.
