How to make EVs insanely cheap using a little-known IRS rule

If you have been following the development of the mileage purchase agreement (MPA), you already know that the lifetime cost of an electric vehicle (EV) is lower than a similar fossil-fuel car. The advantages get better with higher mileage because the cost of a vehicle is a combination of the up-front cost and the ongoing costs. When a car is driven a small number of miles the biggest expense is depreciation of the up-front cost. Fuel and maintenance costs dominate the equation when you have a high-mileage car. EVs cost hardly anything in fuel and maintenance. That is why EVs really shine with high mileage. 

It turns out there is a way to make the high-mileage advantage even bigger.

When I ran the Spring Free EV contest, one of the contestants uncovered a unique tax advantage of owning an EV in a business. The IRS allows the owners of vehicles used in a business to account for their expenses in a simplified way. A taxpayer can account for the expense by just multiplying a standard amount times the number of miles driven in the year instead of itemizing each expense. In 2020, that amount was 57.5 cents per mile. 

Let me walk you through why this is a big deal and amplifies the economics of electric vehicles.

The standard mileage deduction (SMD) is an average of cars and light trucks in the US. Those vehicles are dominated by fossil-fuels and the 57.5 cents is a good reflection of their costs. Electric vehicles, however, are far cheaper over their lifetimes than gas and diesel-powered cars and trucks. They are about 15-35 cents per mile in total costs. The implication is that when you do you books for the IRS, you get to deduct a bigger expense (57.5 cents) than your actual costs since EVs are so cheap.

The first big deal is that you get to keep more of the revenue from your car-based business. If you are a gig driver or a pharma sales person who relies on their car to make money, that can mean a lot of money per year.

The second major implication is that you could be generating a paper loss in your car-based business and that loss can be used, in some cases, against other income.

The net impact is you get a huge benefit from operating an electric vehicle instead of a gas or diesel. 

Let’s walk through an example to make it clear.

Supposed you own a used Chevy Bolt that costs you $17,000 up front and travels 30,000 miles a year. Let’s assume the business generates $14,000 per year in revenue :

Annual gross revenue:                    $14,000

Reported expense ($.575 x 30k):    $17,250

Reported loss:                                ($3,250)

So for tax purposes, you report a loss of $3,250 due to the SMD. Meanwhile, your actual expenses would be closer to 15 cents a mile or $4,500. If you used your actual expense receipts and depreciation calculation, you’d report a gain of $9,500. Depending on your tax bracket that would cost you 20-50% in taxes – it would be $3,325 if you use the median of 35% – which means you saved $6,175 in taxes.

But wait there’s more! 🙂

You generated $3,250 in losses because of the SMD. If you have other sources of income that qualify (e.g. rental income), you can probably deduct that loss from that income, reducing your taxes on it even further. At a 35% tax rate, the loss is worth an extra $1,138 in your pocket and not in the tax man’s. That is a total of over $7,300 in benefit per year!

Now, what if this had been a typical gas-power car or truck? You could use the same SMD, but you real expenses would be about the same (lower if you have an efficient beater and higher if you have a new gas guzzler). Let that sink in. Instead of a paper loss you would have actually lost money on your business. That loss would still probably be useful to offset other passive income, so the net tax advantage of an EV is $6,175. Of course, if you have an efficient 3 year old car, it will also be cheaper than $.575 per mile, but the biggest advantage comes through an EV.

If you are a rideshare driver, a regional salesperson, a carshare owner, or other profession that relies on your car to make a money and you do a lot of miles each year, you can save a lot of money with this IRS rule.

There is a lot of nuance in how to handle the tax advantage, and I’m not a tax professional, so don’t take my word for it. Check with your own accountant. Here is a link to the IRS page explaining rules for business use of an automobile in case you want to dig in deeper.

Photo by CHUTTERSNAP on Unsplash