Small Business Tax

What Social Media Tax Advice Gets Wrong About Business Vehicle Write-Offs

Earmark Team · May 31, 2026 ·

Social media influencers love to throw out tax advice about having your business purchase a vehicle to claim big expenses, especially accelerated depreciation. Sometimes this advice even goes out to people who aren’t self-employed. But as Jeremy Wells, EA, CPA, explains in Episode 27 of Tax in Action, there’s more to deducting the business use of a vehicle than what these influencers would have you believe.

“For most self-employed folks and small business owners, buying a vehicle in the name of your business is probably a bad idea,” Wells argues. The tax law doesn’t care whose name is on the title. It cares about how you use the vehicle, trip by trip. And for most small business owners, you can usually get the same tax effect by owning the vehicle personally.

The episode walks through the statutory framework, including IRC §162, §262, §274, and §280F, along with regulations, revenue rulings, and court cases that govern vehicle deductions. Wells also shares a three-question framework to help determine the best approach for each client’s specific situation.

What Makes Vehicle Use Deductible (And What Doesn’t)

The foundation starts with IRC §162, which allows taxpayers to deduct ordinary and necessary operating expenses of a business. Wells points out that the statute says nothing about ownership; it addresses operating expenses of an automobile used in a trade or business. Meanwhile, IRC §262 says personal, living, and family expenses are not deductible, including commutes between your residence and your place of business.

The key comes from Revenue Ruling 99-7, which Wells emphasizes clearly lays out the difference between a business trip and a personal trip. “We need to think about whether each specific trip is business or personal,” he explains. The unit of analysis is the trip itself, defined by both its origin and destination.

Deductible trips include:

Travel from your main workplace to another workplace in the same area (like visiting a customer)
Attending off-site business meetings in your local area
Driving to a temporary work location outside your metro area

But if a trip begins or ends at your personal residence, it’s typically a commute, meaning it’s personal and nondeductible.

“When I look through a client’s mileage logs, I filter that mileage log in a spreadsheet for the personal residence of that client,” Wells says, sharing his approach. “Nine times out of ten, a lot of those trips begin or end with the taxpayer’s personal residence.”

There’s an important exception. The Tax Court found in Curphey v. Commissioner that trips between a bona fide home office and other work locations are deductible. If your home office qualifies under §280A(c)(1)(A) as your principal place of business, then your residence becomes a business location. But Wells cautions, “It’s not a home office just because you say it’s a home office. It’s a home office because it’s your primary place of working.”

This principle goes back to the Supreme Court’s 1946 decision in Flowers v. Commissioner, which held that business trips must be motivated by “the exigencies of business rather than the personal conveniences and necessities of the traveler.”

The Strict Substantiation Rules You Can’t Ignore

IRC §274(d) requires strict substantiation of vehicle expenses, including the amount, time, location, and business purpose. Wells explains there are two standards: adequate records and sufficient evidence.

“Adequate records” is what taxpayers should strive for: a contemporaneous log combined with documentary evidence like receipts. Wells specifically recommends smartphone apps. “One I usually recommend is MileIQ.” These apps use your phone’s GPS to automatically detect and record trips. “As soon as your phone’s GPS recognizes that you’re moving faster than a normal human being can walk or run, it assumes that’s a trip in a vehicle.”

Without adequate records, taxpayers fall back on “sufficient evidence,” or their own statement plus whatever corroborating evidence they can find, like bank statements showing fuel purchases. But Wells warns, “usually the IRS and the courts will see right through” reconstructed logs created from memory.

The strict substantiation rules of §274(d) supersede the Cohan rule, which normally allows courts to estimate expenses. This catches many practitioners off guard. But Wells puts it bluntly: “When it comes to vehicle use, Congress has effectively eliminated judicial mercy.”

The Depreciation Trap

IRC §280F limits annual depreciation for “listed property,” including passenger automobiles, defined as four-wheeled vehicles rated at 6,000 pounds or less of unloaded gross vehicle weight. The IRS publishes inflation-adjusted limits every year.

But it gets tricky under §280F(d)(2). You can only deduct the portion of depreciation attributable to qualified business use, yet your basis in the vehicle drops by the full depreciation amount, including the nondeductible personal portion. For example, if maximum depreciation is $5,000 and business use is 60%, only $3,000 is deductible, but basis still drops by the full $5,000.

The real danger comes when business use patterns change. As long as business use stays above 50%, normal MACRS depreciation applies. But if business use drops below 50% in any subsequent year, two things happen:

You must switch from MACRS to the Alternative Depreciation System (ADS), which is essentially straight-line depreciation with longer recovery periods.
You must recapture as ordinary income all excess depreciation, which is the difference between what you claimed and what would have been allowable under ADS from the start.

“Accelerated depreciation and especially Section 179 expensing are wagers on future business use,” Wells explains. “You’re essentially gambling that the business use of that vehicle will never drop below 50%.”

There’s another complication for business-owned vehicles. When an employee uses them (including S corporation shareholder-officers), the business use is a nontaxable working condition fringe benefit. But any personal use, including commuting, becomes taxable compensation under §274(l). That means payroll taxes on top of income taxes.

A Three-Question Framework To Cut Through the Complexity

Wells uses three questions to analyze any vehicle situation:

Who owns the vehicle?
Who uses the vehicle?
What percentage of use is for business and how is that expected to change over time?

“In my experience, most mistakes and complex situations arise when taxpayers ignore at least one of these three questions, or the answer to one of these three questions,” Wells says.

He demonstrates with three scenarios involving Jessica and her business, Lighthouse LLC:

Scenario 1: Jessica’s LLC is a sole proprietorship. She uses her personal vehicle 80% for business, but trips begin or end at her residence. A friend recommends buying a vehicle through the LLC for depreciation. “For tax purposes, it makes no difference,” Wells says. The LLC is disregarded, so she deducts expenses the same way regardless of ownership. Plus, Wells notes business ownership usually means “higher financing costs, especially in terms of the interest rate, and higher insurance costs.”

Scenario 2: Now Lighthouse LLC is an S corporation. If the corporation owns the vehicle and Jessica uses it personally, that personal use becomes taxable wages. “A much simpler approach,” Wells says, “would be to reimburse her for the mileage or for the business portion of her actual operating expenses under an accountable plan.”

Scenario 3: The LLC owns the vehicle, but Jessica’s business use has dropped from 80% to 60% and continues declining. She has three options:

Prepare for recapture by making estimated payments (least desirable),
Reduce personal use to keep business use above 50%, or
Distribute or sell the vehicle before crossing the threshold.

“Once business use drops below 50%, that recapture is unavoidable,” Wells says.

The Simpler Alternative: Standard Mileage Rate

Treasury regulations allow taxpayers to use the IRS’s annually published standard mileage rate instead of tracking actual expenses and depreciation. You multiply business miles by the rate, and parking, tolls, auto loan interest, and property taxes remain separately deductible. Everything else, including fuel, maintenance, and insurance, is included in the rate.

“It makes it relatively easy,” Wells says, especially when using a smartphone app for tracking.

The Bottom Line for Tax Professionals

Wells closes with wisdom worth remembering: “The best vehicle strategy is not the one that maximizes this year’s deduction. It’s the one you can defend three years from now.”

For most small business owners, personal ownership of the vehicle combined with proper substantiation and accountable plan reimbursements delivers the same tax benefits without the complexity of business ownership. The key is understanding that deductibility depends on how you use the vehicle, not whose name is on the title.

Having a qualifying home office often provides more value than business vehicle ownership by converting commutes into deductible business trips. And when it comes to depreciation, remember that accelerated write-offs are a bet that business use will stay high. That’s a bet many small business owners will lose as their business evolves.

Listen to the full episode for Wells’ complete analysis of every code section, regulation, and court case discussed here.

Why Your Service Business Client Shouldn’t Have Cost of Goods Sold on Their Tax Return

Earmark Team · February 28, 2026 ·

You’re reviewing a new client’s prior-year returns when something catches your eye. The business is a consulting firm—pure services, no inventory to speak of—yet there’s cost of goods sold on Schedule C. You pull up the financial statements and find “cost of services” listed separately from other expenses. The previous preparer apparently decided consistency was the goal and carried the figure straight over to the tax return.

It’s a mistake Jeremy Wells sees all the time. In fact, he’s seen so many tax returns with this exact error that he devoted an entire episode of Tax in Action to breaking down what cost of goods sold really means for tax purposes and why getting it wrong matters more than you might think.

“I’ve seen a lot of tax returns prepared for new clients coming into my firm, where the returns were either self-prepared or prepared by another firm that reported cost of goods sold for a particular business when I knew that that business should not have reported cost of goods sold,” Jeremy explains.

You might think it all reduces taxable income anyway, so what difference does it make where the numbers land? But that reasoning misses something fundamental about what cost of goods sold actually represents in the tax code.

Only Three Types of Businesses Get Cost of Goods Sold

Treasury Regulation 1.61-3(a) tells us that only three types of businesses calculate gross income using cost of goods sold:

Manufacturing: businesses that produce goods from raw materials
Merchandising: businesses that purchase finished goods for resale
Mining: businesses that extract natural resources

If your client isn’t in one of these three categories, they don’t have cost of goods sold for tax purposes.

“No other kind of business has that formula described in terms of gross income,” Jeremy emphasizes. “Only businesses in those three categories: manufacturing, merchandising, and mining.”

This trips up practitioners because every business has what Jeremy calls “direct costs”—the expenses they must pay to generate revenue. He uses his own firm as an example. They use ProConnect tax software with a pay-per-return model, buying individual credits to file or print each client’s return. These are clearly direct costs related to serving specific clients.

But those software credits are ordinary business expenses, not cost of goods sold. Jeremy’s firm provides services, not merchandise. They don’t manufacture anything. They’re not mining. So despite having clear, traceable direct costs for each client, they don’t report cost of goods sold on their tax return.

The confusion gets worse with modern businesses that blur traditional categories. A business coach might sell one-on-one coaching (a service) while also selling digital products or online courses (potentially merchandise). A content creator might offer consulting while also selling physical products. Each revenue stream needs its own analysis.

“I’ve even had some pushback from new clients when we prepare that first tax return, where the prior returns had cost of goods sold reported, the return I prepared doesn’t, and the taxpayer actually notices and questions that,” Jeremy says.

Understanding which businesses qualify is just the start. The real insight comes from understanding why this classification matters so much.

Cost of Goods Sold Isn’t a Deduction—It’s Income Itself

Every tax professional knows the phrase, “expenses are deductible due to ‘legislative grace.’” Congress decides what deductions you can take. They can expand them, limit them, or take them away entirely.

But cost of goods sold works differently.

IRC Section 61 defines gross income as “income from whatever source derived.” For those three special categories of businesses, the regulations specify that gross income equals gross receipts minus cost of goods sold. This happens before you even think about Section 162 ordinary and necessary business expenses.

“Cost of goods sold is actually part of the definition of gross income when it comes to tax,” Jeremy explains. “It’s not just a special kind of expense.”

The courts have interpreted this to mean that cost of goods sold represents a “return of capital” rather than a tax deduction. When a store buys inventory for $50 and sells it for $100, that first $50 isn’t income; it’s just getting back the money they invested. The income is only the $50 profit.

This has real implications for what costs belong in the calculation. The basic formula is:

Beginning inventory + purchases of inventory + production costs (direct labor, freight)

– ending inventory

= cost of goods sold

Selling, general, and administrative expenses never belong in cost of goods sold, no matter how essential they are to running the business. These are always ordinary expenses.

The courts don’t care what you call things. In Atkinson v. Commissioner, a taxpayer tried to classify operating expenses as cost of goods sold. The Tax Court rejected this because the costs weren’t directly tied to inventory. As Jeremy notes, “Economic reality controls over labels used on tax returns or financial statements.”

For most businesses, this distinction is about accuracy. But there’s one area where understanding the difference between cost of goods sold and deductions becomes absolutely critical.

When Getting It Wrong Can Cost Millions: The Cannabis Example

IRC Section 280E is tough on cannabis businesses as it allows no deductions or credits for businesses trafficking in Schedule I or II controlled substances. Since marijuana remains Schedule I under federal law, dispensaries can’t deduct rent, utilities, salaries (except those directly tied to inventory), or any other ordinary business expense.

Their taxable income essentially equals their gross income. Except for cost of goods sold.

“Section 280E doesn’t disallow cost of goods sold,” Jeremy explains. “Because cost of goods sold is not an ordinary deduction; it is a reduction of gross income.”

This distinction became the center of Californians Helping to Alleviate Medical Problems (CHAMP) v. Commissioner, a 2007 Tax Court case that Jeremy calls “a really good illustration of why this concept is important.”

CHAMP operated both a medical marijuana dispensary and provided caregiving services for patients. Same business, two revenue streams, completely different tax treatment.

The IRS looked at the business and said it was trafficking in marijuana, Section 280E applies, no deductions allowed. CHAMP argued that costs of acquiring marijuana inventory were cost of goods sold that reduced gross income.

The Tax Court partially agreed. They allowed cost of goods sold, but only for costs directly tied to acquiring marijuana inventory. The dispensary’s operating costs were disallowed under 280E. It also disallowed the caregiving service costs and since caregiving is a service, those costs couldn’t be cost of goods sold anyway.

“The Tax Court allowed cost of goods sold, but only for the inventory-producing activity, only for the merchandising part of the business,” Jeremy clarifies. “Not for the caregiving services.”

This case shows having inventory isn’t enough to sweep all your costs into cost of goods sold. When a business has multiple activities, you have to analyze each one separately. And courts always look at economic substance over whatever labels you use.

Common Mistakes and How to Fix Them

Jeremy shares a frustration many practitioners face: clients who report the same inventory year after year or give suspiciously round numbers.

“We ask for their ending inventory and we get the same number as last year’s ending inventory, or we get round numbers,” he says. A restaurant claiming exactly $1,000 in beverage inventory while doing millions in revenue? “I seriously doubt that it’s an accurate reflection of their inventory.”

For sole proprietors and single-member LLCs, cost of goods sold goes on Schedule C, Part III. Corporations and S-corporations use Form 1125-A. Both forms walk through the same calculation: beginning inventory, plus purchases and production costs, minus ending inventory.

The key is educating clients about proper inventory counts and valuation. This matters for accuracy and for defending the numbers if the IRS asks questions. The substantiation requirements are the same as for any business expense. You must prove costs were incurred, properly classified, and correctly valued.

Jeremy also mentions that inventory valuation methods matter. Businesses can use First-In-First-Out (FIFO), Last-In-First-Out (LIFO), or average cost methods. But consistency is necessary. You can’t switch methods year to year just to get better results.

One final note on the future: if marijuana gets removed from Schedule I, Section 280E would no longer apply to cannabis businesses. But Jeremy cautions this would likely only affect future years. “It’s very unlikely that something like that would happen” retroactively, he explains. For now, the distinction between cost of goods sold and ordinary expenses is critical for every cannabis business.

The Bottom Line for Tax Professionals

If you take away nothing else from this episode, remember cost of goods sold belongs only to manufacturing, merchandising, and mining businesses. A consulting firm with “cost of services” is ordinary expenses. Same for the coaching business tracking direct costs.

“Just because the financial statements report cost of goods sold or cost of sales or cost of services doesn’t mean the tax return should or even can have cost of goods sold,” Jeremy emphasizes.

This isn’t about matching financial statements to tax returns. Cost of goods sold represents a return of capital invested in inventory, not just another expense category. When you get this right, you properly calculate income.

For most clients, fixing this means moving numbers from cost of goods sold to ordinary expenses. When they ask why their return looks different, you now have the framework to explain why accuracy matters more than consistency with an incorrect approach.

For cannabis clients, the stakes are much higher. Under Section 280E, properly identifying cost of goods sold might be the difference between staying in business and closing doors.

Whether you prepare returns for a local retailer or advise a multi-state dispensary, you should understand what cost of goods sold really means, know which businesses qualify, and report costs where they belong based on substance, not convenience.

To dive deeper into the regulations, court cases, and practical examples, listen to the full Tax in Action episode. Jeremy walks through each concept step by step, giving you the technical foundation to turn confusion into competency.