Deducting Car Expenses for Your Business

Fri, Apr 20, 2012


Tax day is now mere hours away, but as you scramble to get your taxes filed on time, it’s important to make sure you are getting every possible deduction. Times are tight, and saving a few dollars can sometimes mean the difference between keeping your business afloat and being forced to close the doors. Regardless of the specifics of your work, chances are you use your car in some aspect of your business activities. It can be a bit confusing trying to figure out how to best deduct your business-related automotive expenses from your taxes. But with some forethought and organization, it can amount to a huge savings on your tax bill. Here’s a quick look at how to best deduct your business car expenses.

The first step is understanding how the IRS defines business use of your vehicle. Basically, business use is any time you drive between two business locations. Whether that’s between a home office and a main office, from your office to a client’s or to a worksite, all of these miles are legally deductible as expenses. You can even deduct the miles you drive between your home and some temporary work site. Just keep in mind that you can’t deduct the mileage of your daily commute. Sorry, but the home to office trek you do twice a day all year is on you.

Now that you understand what type of mileage you can deduct, it’s time to determine which method of computing costs you would like to utilize. The two ways you can determine your automotive expenses is through either the actual cost method or the standard mileage rate. If you choose the standard mileage rate, you will end up claiming a flat rate for each mile you drive for business. That rate fluctuates based on the price of gas, so check with the IRS to determine this year’s standard mileage rate. This method is clean and simple, as you need only multiply the mileage you’ve driven for business purposes by the IRS’ standard rate, and you’ve landed on your deduction. If you choose to go with the actual cost method of deducting, you will need to determine each automotive expense individually. That includes all upkeep on the vehicle, oil and gas costs, any repairs, all of your license and registration fees, any depreciation on an owned vehicle, and insurance costs. When you’ve got all of the individual expenses tallied, you simply multiply that total number by the percentage of time you use your vehicle for business. In that case, it must be based on the actual mileage you’ve driven for business versus personal use, not just on estimation.

How do you choose which method to use for this year’s taxes? It’s always a good idea to check with your CPA to get a professional opinion, but both offer fantastic savings on your tax bill. Keep in mind that if you choose the standard mileage deduction in your first year of ownership, you can switch to the actual cost method the next time around. But if you start with actual cost, you have to stick with that accounting method for the life of the vehicle. You may end up with a larger deduction from the actual cost method, but you’ll also be held to a higher standard of recordkeeping. Regardless of which you choose, make sure you always note the date and mileage for business travel, and get the best car insurance policy you can. You’ll put out effort and money now, but it will pay back dividends in tax savings every year you are in business.

Jamie Byers is a contributing writer for www.kanetix.ca, where you can find and compare online car insurance rates and browse customer reviews.

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