Business Vehicle Depreciation: Considerations for Self-Employed Owners

Eric B. inquires about breaking rule 238 for a business asset; financial advisors advise against it due to potential negative outcomes.

### Business Vehicle Depreciation: Why Breaking the 238 Rule Might Not Be Wise
* 💼  Brian and Bo discuss whether it's advisable for self-employed individuals to break the **238 car-buying rule** for a work-rated vehicle.
* 💰  Brian's short answer is "**no**," citing potential pitfalls of **accelerated depreciation** and **unexpected vehicle replacement costs**.
* 🚗  Bo emphasizes the importance of **aligning business asset financing with expected asset lifespan** to maintain profitability.
* 💸  Brian suggests that paying cash for a vehicle, even in a business context, can be a better alternative to **breaking the 238 rule**.
* 🔢  The **238 rule** involves putting down **20%**, financing for no more than **3 years**, keeping payments under **8% of gross income**, and ensuring investments exceed **car payments**.
* 🏎️  The rule aims to promote **affordable, reliable transportation**, rather than **luxury or status symbols**.
* 📊  Brian warns against taking accelerated depreciation without considering **potential negative outcomes**, especially for **high-mileage work vehicles**.
* 🔮  Bo advises business owners to adopt a **conservative approach to financial planning**, considering worst-case scenarios and **avoiding risky financing strategies**.

[Music] Yep, I've got one to start us off from Eric B. He says, I'm self-employed, and the vehicle I drive is 100% work-rated. I'm not trying to buy anything new, but I will need a car that's somewhat expensive. Can I break the 238 car-buying rule since it will be depreciating over six years? M, is it ever okay to break 23A? I'm interested to hear what you all say to this. Well, okay, so that's an interesting question, right? So there's two qu... Well, it's interesting. A lot of people ask us, Is it ever okay to break 238? But I do appreciate Eric throwing a unique flavor on there, Brian, that we haven't talked a ton about because now it's a business asset. So he owns some sort of business where automobiles required, maybe it's a construction company work truck, something like that, and there are unique tax rules surrounding how you can use an automobile in business. So if that's the case, can he break 238 since it's a

business asset. What say you? I give you the short answer first: no. Now let me give you the details. And no, I want to give some flavor on this so that Eric knows we're just not mean. And I'm not playing my Susie Orman part where I just say no to everything. There's actually some logic behind this and math as well. A lot of times, especially you gave us a lot of clues here. You said you use this 100% of the time for business. When I was doing my tax preparation season of life for those 16 years, I was shocked to see how many miles that people put on work vehicles. You know, I think about sales reps, people who use vehicles to go out to customers. I think about construction crews when they're going and servicing clients or going to sites. It's not uncommon for vehicles to get 45,000, 50,000, 60,000 miles in a single year. I mean, I see this all the time. We don't have the clarification on

how long Eric's using it, and then he mentioned he was going to depreciate this over 6 years. So off the cuff, that means this probably is not a 6,000 or pound or greater vehicle because he's already talking about. But even, even if it's less than six, even if it weighs less than 6,000 lb and doesn't qualify for that super accelerated depreciation, even cars that weigh less than the 6,000 get some form of accelerated depreciation. And what I always worry about, think about this, if you have somebody who's using a vehicle for 100% use and they're wearing this vehicle out, so it's probably not going to make 6 years, but they're also going to take some accelerated depreciation, even if it's not 100%. The beginning, you get to the part where you need to replace this vehicle, plus you get to the part that your taxes are higher because you took the accelerated depreciation a few years earlier. You could have an actual double whammy on

this situation where you were actually looking for flexibility, but all you did was you actually squeezed yourself and turned a good situation into a bad situation. Because you're looking for a way to spread out the cost of this, I would rather you be conservative, especially with business. Remember how often I talk about you put on your 3D glasses and you run your dream plan, you run your down toe, and then you run the doooo plan because things can go bad. I worry if you're not taking into account how bad things could be if all of a sudden you had a a squeeze of your client base or you knowing your business. You took all those accelerated depreciation a few years earlier and now the vehicles breaking. Just be careful. I'd rather you go conservative as a business owner than just to assume everything's going to work out perfectly. Yeah, one of the things I think is is really unique is that often times when we see small businesses, it is a reflection the way that a small business operates is a reflection of the owners.

or the individual's personal life. Like if they don't necessarily make fantastic personal financial decisions, often times that bleeds into the business. Stepping away from 238, just kind of thinking academically about what you said. I'm a business owner. I'm going to go buy a piece of equipment, and I'm going to borrow money to pay for that piece of equipment longer than it will be in use. If that's the way that you are executing business practices, you're going to run into some headwinds. Like it's going to be a hard thing to keep a profitable business, especially if it's a capital-intensive one, if you're making those kinds of decisions. So whether 238 is applicable or not, I think one of the things that might behoove you is don't pay for an asset for longer than you're going to use it inside your business, or else you're never going to be able to play catch up. Now let me speak to the other side of it. Is it ever okay to break 238? Absolutely, if you want to.

go pay cash for a car. You don't have to do two. You can absolutely do that and that would be our preference. We love people to pay cash for cars. Certainly even inside of the business environment. If you have Capital where you can do that, you're not having to lose money to interest expense. You still get the benefit of the depreciation. Great to break 238 in that direction. I don't know that I'd be super excited to break in the other direction. And remember, I want you to like and subscribe because we a lot of you guys over half of you are brand new to the channel. If you don't know what 238 is, 238 is a car buying rule or vehicle rule where you're putting down 20%. You're not financing longer than 3 years. And you're making sure that the payments don't exceed 8% of your gross income. And also you're making sure your Investments exceed your car payment. And a big part of this whole thing is just to make sure

that you're having a bridge to affordable reliable transportation we always agree with Bo if you can pay cash for a vehicle by all means pay cash for the vehicle this is supposed to be the Corolla rule not the Land Cruiser rule where you get reliable transportation not to flex and show off or get rules that give you opportunities to buy luxury Vehicles ahead of time

Can I Break the 20/3/8 Rule for a Work-Related Vehicle?

Bring confidence to your wealth building with simplified strategies from The Money Guy. Learn how to apply financial tactics that go beyond common sense and help you reach your money goals faster. Make your assets do the heavy lifting so you can quit worrying and start living a more fulfilled life.

Subscribe today to stay up to date with our latest episodes, livestreams, and highlight videos: https://www.youtube.com/c/MoneyGuyShow?sub_confirmation=1

Are you ready to go beyond common sense when it comes to your money? Check out all the free resources The Money Guy Show provides: https://moneyguy.com/resources/



The Money Guy Show

Discussion on Breaking the 238 Car-Buying Rule for a Business Asset

Self-employed individual seeks to break the 238 car-buying rule for a work-rated vehicle, but the short answer is no.

Using a vehicle for business purposes doesn taken into account, especially with high mileage, and there is a logic and math behind this decision.

Eric plans to depreciate the vehicle over 6 years, potentially facing higher taxes due to accelerated depreciation.

Using accelerated depreciation can lead to a situation where the vehicle needs replacement, and taxes are higher, creating a financial challenge.

It's advisable for Eric to take a more conservative approach in his business and consider potential challenges in the future.

Making Sound Business and Financial Decisions

Personal financial decisions can impact business practices, especially in a capital-intensive business, where paying for an asset longer than its use can hinder profitability.

However, breaking the rules, such as the 238 car buying rule, can be acceptable, especially when paying cash for an asset, avoiding interest expenses, and benefiting from depreciation.

It's important to make sound financial decisions to ensure business success and consider breaking the rules when it financially benefits the business.

The Corolla Rule: Prioritizing Reliable Transportation Over Luxury Vehicles

Paying cash for a vehicle is recommended for affordable and reliable transportation, following the Corolla rule.

This rule emphasizes the importance of prioritizing reliable transportation over showing off or buying luxury vehicles.

It discourages the practice of using opportunities to purchase luxury vehicles ahead of time, promoting a practical approach to vehicle ownership.