Auto Repair Shop Tax Deductions Insights
7 minute read
April 3, 2023


The auto repair industry is a competitive market, and one factor that can significantly impact a business’s bottom line is taxes.

It’s important for your business to make money—but even more important to keep it.

Auto shop accounting demands strategic planning and effective management to ensure that your auto repair shop doesn’t have to pay more than your fair share of taxes.

Implementing tax-saving strategies specifically tailored to auto repair shops can help you take advantage of the available deductions and credits, ultimately resulting in a healthier financial outlook.

Claim the ERC tax credit for your auto repair business

We mention the Employee Retention Credit (ERC) first because there are big IRS credits available for businesses impacted by the COVID-19 pandemic. Additionally, the tax credit could be worth more than all your deductions combined.

In the height of the work-from-home era, you may have experienced a drop in revenue due to people suddenly not having to drive.

A small business of just five employees could claim more than $200,000, even if you didn’t pay that much in taxes.

The credit was designed to help businesses stay afloat while keeping employees on payroll during the pandemic. Businesses can still claim the credit until around April 2025 by amending 2020 and 2021 tax returns.

To be eligible for the ERC, your business operations have been fully or partially suspended due to a government order related to COVID-19 or you’ve witnessed a considerable plunge in gross receipts in 2020 or 2021 compared with the same quarter in 2019.

To claim the ERC credit, don’t go it alone. Get the help of an experienced CPA with knowledge of how to legally get your maximum credit.

Get started with your specialized self-employed mortgage.

Capitalize on tax deductions

One of auto repair shops’ most effective tax-saving strategies is capitalizing on tax deductions.

The Internal Revenue Service (IRS) allows businesses to deduct necessary and ordinary expenses incurred in carrying out their trade or business. Auto repair shops should aim to maximize these deductions by carefully tracking and categorizing their expenses.

Some common deductions for auto repair shops include the following.

Tools and equipment

Auto repair shops rely on specialized tools and equipment to provide their services. The cost of tools and equipment can be fully or partially deducted, depending on their lifespan and usage.

According to the IRS, tools with more than one year of useful life should be depreciated over their useful life, while those with a shorter lifespan can be expensed in the year of purchase.

Vehicle expenses

Auto repair shops often utilize vehicles for parts pickup, customer shuttle services, or towing. Business-related vehicle expenses, including mileage, gas, maintenance, insurance, and depreciation—are generally considered deductible by the IRS.

It’s essential to keep accurate records of the miles driven and expenses incurred for each vehicle to maximize this deduction.

Employee wages and benefits

Employee wages and benefits are often some of the most significant expenses for auto repair shops. Deductions can be considered for salaries, wages, bonuses, and employee benefits, such as retirement plans, health insurance, and workers’ compensation insurance.

Rent and utilities

The cost of renting or leasing a shop space and utilities like electricity, water, and gas can be deducted as business expenses. This can also be the case for rent paid on property used for business purposes and utilities necessary for the operation of your auto repair shop.

Advertising and marketing

Promoting your auto repair shop through advertising and marketing efforts are essential for attracting new customers and maintaining existing client relationships.

Deductions for advertising and marketing costs are frequently included in any small business tax return—like online ads, print materials, and promotional events.

Become a homeowner

Owning a home can be a dream come true for many of us. Not only does it provide a sense of security and stability, but it also comes with several tax benefits.

As an American homeowner, you can take advantage of various tax-saving strategies that might help you save a significant amount of cash on your taxes.

Mortgage interest deduction

One of the most popular tax benefits of owning your own home is the mortgage interest deduction. This deduction enables you to deduct the interest paid on your mortgage from your taxable income.

This strategy can result in substantial savings, especially in the early years of your mortgage when your interest payments are typically higher.

Property tax deduction

Another frequently used tax benefit by homeowners is the property tax deduction. Property taxes are generally deductible, which means you can deduct the amount you pay in property taxes from your taxable income.

This deduction can be a significant benefit—especially if you happen to live in a high-tax area.

Capital gains exclusion

When it finally comes time to sell your home, so long as you make a profit, you may be eligible for something called a capital gains exclusion.

This particular exclusion allows you to exclude up to $250,000 of the profit from the sale of your home from your taxable income.

By taking advantage of these tax-saving strategies, you can significantly reduce your tax bill and keep more of your hard-earned money in your bank account and investments.

Pro Tip: Self-employed and worried you would lose out on a mortgage if you write off too many expenses? These no-tax-return home buying and refinance programs are tailor-made to help self-employed individuals:

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  • Self-employed mortgage programs
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  • No tax returns

Utilize tax credits

In addition to deductions, auto repair shops can also take advantage of various tax credits to reduce their tax liability. Tax credits directly reduce the tax owed, making them a powerful tax-saving strategy. Some applicable tax credits for auto repair shops include the following.

Work opportunity tax credit (WOTC)

Depending on your hiring practices, the Work Opportunity Tax Credit (a.k.a. the WOTC) is a federal tax credit available to many Auto Repair Shop employers who hire individuals from specific target groups, such as veterans, ex-felons, and individuals receiving government assistance.

Auto repair shops can claim this credit by hiring eligible employees and completing the necessary paperwork with the IRS.

Small employer health insurance tax credit

Small auto repair shops that provide health insurance for their employees may qualify for the Small Employer Health Insurance Tax Credit.

This IRS credit is available to businesses with fewer than 25 full-time equivalent employees whose average annual wages are less than $50,000.

To claim the credit, employers must offer a qualified health plan through SHOP, also known as the Small Business Health Options Program Marketplace.

Maintain accurate records

Effective tax-saving strategies for auto repair shops hinge on accurate record-keeping.

By diligently tracking income, expenses, and other financial transactions, auto repair shop owners can easily identify and substantiate deductions and credits on their tax returns.

Key record-keeping tips for auto repair shops include:

  1. Implementing a reliable accounting system to record financial transactions.
  2. Maintaining organized files for receipts, invoices, and other financial documents.
  3. Separating personal and business expenses to avoid confusion and potential tax issues.

Consult with a tax professional

Navigating the complex world of tax-saving strategies for auto repair shops can be challenging.

To ensure compliance with IRS regulations and maximize tax savings, consulting with a tax professional is often beneficial.

A knowledgeable tax advisor can help you identify applicable deductions and credits, guide record-keeping, and offer strategic advice to optimize your tax planning.

Tax strategies for auto repair shops—the bottom line

In conclusion, implementing tax saving strategies for auto repair shops can significantly impact your business’s financial health.

By capitalizing on deductions and credits, maintaining accurate records, and consulting with a tax professional, you can effectively minimize your tax liability and improve your bottom line.

Leveraging these tax strategies, auto repair shop owners can better position their businesses for long-term success.

See if you qualify for a self-employed mortgage loan.

My Perfect Mortgage does not provide tax, legal or accounting advice. This material has been prepared for informational purposes only. Consult advisors before filing taxes or engaging in any transaction.

Our advise is based on experience in the mortgage industry and we are dedicated to helping you achieve your goal of owning a home. We may receive compensation from partner banks when you view mortgage rates listed on our website.

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