HOW TO DEDUCT AUTO EXPENSES FOR YOUR BUSINESS April 2009

One of the most common tax deductions for a business is for car and truck expenses. If you use your vehicle for work in your own business, you can deduct some of the related expenses. Exactly what you can deduct depends on how you calculate your deduction. The IRS offers you two choices. You can use either the standard mileage rate method, or you may deduct the actual expenses. In 2008, the standard mileage rate was 50.5¢ for January 1st through June 30th, and then increased to 58.5¢ for July 1st through December 31st. In 2009, the standard mileage rate decreases to 55¢ per mile.

You may use the standard mileage rate if:

• You own or lease the car yourself.
• You are not using the car as a taxi or other vehicle for hire.
• You are not using five or more cars at the same time for business (as in a fleet operation.)
• You have never claimed an accelerated method of depreciation or taken a section 179 expense deduction on the vehicle.

If you own the car, and you want to use the standard mileage rate method, you must use this method in the first year you start using the vehicle for business purposes. Thereafter, you can switch to the actual expense method. If you lease the car and choose the standard mileage method, you must use this method for the entire lease period of the car.

Additionally, if you take the standard mileage deduction, you may not deduct car expenses such as gas, maintenance, or insurance. However, you may deduct your business related payments for parking fees and tolls, personal property taxes on your car, and interest on your car loan. It is also important to keep complete records. To claim the standard mileage rate, appropriate records would include documentation identifying the vehicle and proving ownership or a lease and a daily log showing miles traveled, destination and business purpose.

A business purpose would include:

• Traveling from one work location to another within the taxpayer’s home area. (Generally, the tax home area is the entire city or general area where the taxpayer’s main place of business is located, regardless of where he or she resides.)
• Visiting customers.
• Attending a business meeting away from the regular workplace.
• Getting from home to a temporary workplace when the taxpayer has one or more regular places of work.

To use the actual expense method, you must determine what it actually costs to operate the vehicle. In addition to parking fees and tolls you should include gas, oil, repairs, tires, insurance, registration fees, licenses, and depreciation (or lease payments.) If the business use of the vehicle is less than 100 percent, expenses must be allocated between business and personal use. Only the business use percentage of each expense is deductible. The most common way to do this is to keep track of business miles driven for the year, and divide that amount by the total miles (personal and business) for the year.

For example, if a taxpayer drove 15,000 miles in a given year for business and the total miles driven (for personal and business) is 20,000 miles, the business use percentage of the vehicle is 75%. Additionally, if, based on records maintained by a taxpayer, total actual vehicle expenses for a given year are $2,500 the allowable deduction using the actual expense method is $1,875 ($2,500 x 75%).

For actual expenses, a mileage log helps establish business use percentage. Taxpayers should also retain receipts and invoices. For depreciation purposes they need to show the original cost of the vehicle and any improvements as well as the date it was placed in service. Additionally, if the actual expense method is chosen in the first year, it must be used in all subsequent years until the vehicle is no longer used for business.

You may be wondering now which method is best for you. If you are eligible to use either method, calculate the standard mileage deduction, then calculate your actual deductible expenses, and see which one is higher. Remember, the larger the deduction, the lower your taxes.

The information set forth herein was obtained from sources I believe reliable, but I do not guarantee its accuracy.

Very Truly Yours,

Brian Berlage

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