Tax Tips for Entrepreneurs
Deducting Car Expenses
For some businesses, car and auto income tax expenses can really add up. But car expenses may be subject to special circumstances that can limit the amount or your deduction.
In today's economic climate, mobility is a prerequisite for business success.
Owners and employees who are tied to a single location can't function nearly as efficiently as individuals who travel from one destination to the next, especially in multi-site businesses that share management resources and key personnel.
From a financial perspective, it costs less to pay employee travel expenses than it does to hire additional staff. Rather than maintaining a business fleet, many employers choose to reimburse their employees' for personal car expenses. And for sole proprietors or small shop operations, the owner's business car expenses can represent a sizeable portion of the company's travel budget.
Calculating deductible car expenses isn't difficult. The challenge is to differentiate what qualifies as a car expense according to IRS rules and choose the appropriate method for calculating car vehicle deductions.
IRS Car Expense Rules
The first step in determining the deductibility of car expenses is to determine the vehicle's percentage of business use. The IRS prohibits taxpayers from deducting car expenses for personal use, including the use of a personal vehicle in a daily work commute. Under IRS guidelines, taxpayers can deduct car expenses for (1) travel between workplaces, (2) business trips for meetings with clients, business contacts, or conferences, and (3) travel to a temporary worksite. Taxpayers who take a car expense deduction are expected to diligently maintain vehicle expense records that support the method they use to calculate the car expense deduction.
Methods for Calculating Deductions
There are two methods for calculating a car expense deduction. The selected method is completely at the discretion of the taxpayer and their tax advisor:
- Standard Mileage Method. The standard mileage method is the simplest way to deduct car expenses on a business or personal tax return. Taxpayers keep a record of the number of miles they have traveled for qualified business purposes and multiply it by the standard IRS mileage rate for the given tax year.
- Actual Expense Method. For the actual expense method, taxpayers track the actual costs associated with the vehicle including gas, oil, tires, repairs, license fees, lease payments, registration fees, garage rental, insurance and depreciation. These costs are then multiplied by the percentage of business use to determine the amount of the car expense deduction.
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