Key Takeaways
- If you work for someone else at a garage, you likely are an employee and can use your W-2 to file your income taxes.
- If you’re self-employed, you can report your business income using Schedule C.
- If you’re self-employed, you may be able to deduct ordinary and necessary expenses such as advertising, insurance premiums, repairs and maintenance, safety supplies, and travel.
- As a business owner, you can usually have a business structure such as a partnership, S corporation, or C corporation, which require filing separate tax returns.
Tools for taxes
If you're a mechanic — whether you work on cars, small engines, diesel engines, boats, or even aircraft — you may benefit from some key deductions and credits come tax time. First, you need to know what's available to you based on your employment status or business structure.
Know your tax status
You first need to know your employment status as a mechanic before you consider deducting tools and other expenses. Many mechanics that work for garages or businesses are employees. You'll know you're an employee if you filled out a Form W-4 when you got hired and receive a W-2 at the beginning of each year.
Other mechanics run their own garages. In some cases, mechanics may choose to form a business entity, such as a:
- Partnership
- S corporation
- C corporation
These business structures require filing separate tax returns.
However, many mechanics operate as self-employed individuals. You'll know you're self-employed if you don't receive a paycheck from a company and you file your business taxes on Schedule C of your Form 1040 tax return each year.
Filing your taxes with Schedule C
Filing your taxes as a self-employed individual is fairly straightforward using Schedule C. You will need to fill out some basic information about your business, such as your:
- name
- principal business or profession
- business name (which may simply be your name if you're self-employed)
- Social Security Number (SSN)
- Employer Identification Number (EIN) (if you have previously applied for one)
- business address
- accounting method (cash or accrual)
Next, the form asks for your:
- income
- cost of goods sold
- expenses
You will also have to provide information about your vehicle if you claim car or truck expenses.
Once you've completed Schedule C, the information is then used in other areas of your personal tax return.
Deductions self-employed mechanics can take
Self-employed mechanics can take advantage of many deductions to help lower the tax they'll owe. All expenses need to be both "ordinary and necessary" in your trade as a mechanic. The IRS defines these expenses as ones that are common to your profession and help you accomplish your work-related tasks.
Common expenses mechanics may incur in their businesses include:
- advertising and marketing costs
- bank fees
- business-related insurance premiums
- certain taxes, but not federal income tax
- legal and accounting fees
- rent on your shop
- repairs and maintenance
- safety supplies and equipment
- state licensure fees
- trade journals
- travel
- uniforms
- utilities
- vocational training
TurboTax Tip:
You can typically deduct the cost of a necessary piece of equipment instead of depreciating it if it costs $2,500 or less.
Depreciation
Another potentially large expense mechanics may incur is depreciation. This is the process of spreading out the cost of long-lasting assets over the period of time the assets are used.
Depreciation is why tax deductions for mechanics' tools are a bit more complex than many other deductions. In theory, tools that last for more than one year should be an asset that is depreciated over its useful life. This means you typically don't get to deduct the entire cost upfront as you would with supplies. Even so, other rules allow for depreciating some long-lived tools in the year you put them into service.
First, the IRS has a de minimis safe harbor election rules that allows eligible businesses to deduct tools as an expense as long as they cost $2,500 or less. If your business meets the requirements, you would include these tool expenses in the supplies line item on Schedule C. This includes many of the tools that mechanics use every day — think torque wrenches, impact drivers, and curbside jacks.
You generally need to depreciate long lasting tools and equipment that do not meet the de minimis requirements. This makes sense for major machinery, such as lifts, that could last for several years. You can learn more about how to depreciate an asset and have TurboTax calculate your depreciation for you when filing your tax return.
Congress has recently passed legislation that may allow you to accelerate the depreciation of new tools and equipment. Through 2023, bonus depreciation will allow you to depreciate certain assets at 100% in the first year you put them into service. After 2023, this is scheduled to phase out by 20% each year and end altogether after 2026. Not all states currently comply with bonus depreciation, so check with your local regulations. You might have one form of depreciation for your federal taxes and a different one for your state taxes.
Finally, a specific IRS provision known as Section 179 allows businesses to deduct 100% of the cost of certain “tangible property” such as machinery and equipment in the tax year it is placed in service. You can also elect to deduct the cost of qualifying improvements to “real property” under Section 179, such as a roof repair to a nonresidential property you use for your business.
For tax years after 2017, the maximum amount for this deduction is $1 million. This maximum gets adjusted for inflation starting in 2019. The limit rose to $1,020,000 for 2019, $1,040,000 for 2020, $1,050,000 for 2021, $1,080,000 for 2022, 1,160,000 for 2023, and $1,220,000 for 2024.
Other limitations or exceptions may also apply. For example, placing more than $3,050,000 of Section 179 property into service in the 2024 tax year would result in a lower Section 179 deduction limit. Each dollar added above the limit reduces the allowable Section 179 expense by one dollar. Very specific categories such as businesses in government-designated Enterprise Zones may face other changes from the standard treatment as well.
Finally, a limit based on business income exists. Your Section 179 expense is limited to the taxable income from the active conduct of a trade or business during the year. If your Section 179 deduction is limited by this rule, you can carry the deduction forward to the following year for an unlimited number of years. This applies to Section 179 expenses incurred in tax years beginning after 2015.
Bad debt
Another potential expense you may qualify for is bad debt expense. This occurs when you determine a debt owed to you that you included in taxable income is no longer collectible.
To qualify for this deduction, you must use an accounting method that requires you to recognize income when you earn it rather than when you receive it. This is typically called accrual accounting. Most mechanics operate on the cash basis of accounting, which records income when they receive it. The cash method of accounting does not qualify for the bad debt expense deduction because if you didn't get paid for something then it would not have been included in your income. A hybrid accounting method that combines cash and accrual may qualify for this deduction.
You may be able to deduct bad debt expenses when using the accrual or hybrid accounting methods because you recognized the income and may have paid taxes on it, but then never received the income. The bad debt expense deduction allows you to claim a deduction against that income you already recognized so you don't pay taxes on income you never receive.
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