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Get the Biggest Tax Deduction You Can for Your Business Car Use

© 2000, by Jan Zobel, EA

If, like most entrepreneurs, you use a car or truck in your business, you're probably anxious to take as much as you can in tax deductions for this expense. As with other business expenses, good recordkeeping is the key to maximizing your tax savings.

In order to deduct the expenses of operating your vehicle, you need to know how many total miles you've driven during the year, and how many of those miles were for business. If you have a deductible office-in-home, your car may be used 100% for business if a second car is available for personal mileage. Without the home office, however, your car expenses generally won't be 100% deductible because your business mileage isn't considered to start until you get to your first stop of the day. From home to the first business stop of the day and from the last stop of the day to home is considered commuting, just as if you were working for someone else.
 
If you don't have a deductible office-in-home, you may want to consider ways of reducing your commuting or nondeductible mileage. Would it be appropriate for you to have a post office box for your business? If so, open one near your home. Can you buy from a supplier near your home? If so, do it. From home to the post office or supplier will still be commuting, but from that point on, you have deductible business miles.
 
If you travel to a business location outside your tax home (the approximately 40-mile perimeter around your main place of business), you can include the miles to and from your home as business miles even if you don't have a deductible home office. This exception to the general business mile rules will be helpful to those who travel great distances for their business, but don't have a deductible home office.
 
Keeping Records
 
The key to deducting business mileage is having good records. Keeping track of the total miles you drive your car each year is easy; just write down the odometer reading each January 1. If you don't have that figure for this year, repair bills (which usually include the odometer reading) may help.
 
Keeping track of the business miles is harder. Ideally, you'll keep a log (available at any office supply store) or notebook in your car. Write down either the beginning and ending odometer reading for each business trip, or note how many business miles you drive each day. In either case, also note what business locations you visited.
 
Although it's easy once you get into the habit, many people don't want to be bothered keeping a car log. If you're one of those people, see if one of the following methods works better for you:
  • Write down in your appointment book how many business miles you drive each day; the calendar notations will indicate what business locations you visited.
  • If you go on the same route or to the same location regularly, measure the distance once and count the number of times you make the trip during the year.
  • If you use your vehicle primarily for business, instead of keeping track of the business miles, keep track of the number of personal miles you drive.
  • If your business driving is similar throughout the year, keep detailed records for 1 month each quarter or for 1 week of each month. This will give you enough information that you can fairly accurately calculate your annual business mileage.
Calculating the Deduction
 
Whichever way you keep your records, once you know the total number of miles the car was driven for the year and how many of those were for business, there are two possible ways of deducting your car expenses (see the example).
 
The first is called the actual expense method. To use this method, add together your expenses for gas, oil, repairs, insurance, auto club membership, car license, and loan interest or lease payments. Then multiply the total expenses by the percentage you use the car for business. Add the car's depreciation to this figure (unless you lease the car), along with your business parking and tolls. The end result is your total business car expense.

The second method of deducting your car expenses is called the mileage rate or standard method. To use this method, multiply the number of business miles you drove during the year by the IRS proscribed amount. For 1999, that was 32.5¢ a mile for January through March and 31.5¢ a mile for the remainder of the year. For 2000, the allowed amount is 32.5¢ a mile. The only expenses you can add to this figure is the business percentage of your car loan interest and car registration, and your business parking and tolls (parking tickets are never deductible). All other expense are considered to be covered by the per-mile deduction.
 
You can change methods from year to year as long as you use the standard or mileage rate method the first year you buy the car or begin using it in your business. If you use the actual expense method the first year, you'll have to continue using that method as long as you own this car.
 
The recordkeeping for car use may seem tedious but, since this is often a sizable expense for your business, the resulting tax deduction will make your efforts worthwhile.

The above is an excerpt from Jan's recently revised book, Minding Her Own Business: The Self-Employed Woman's Guide to Taxes and Recordkeeping (Adam Media Corporation) which is available for only $8.76 at Amazon.com.

 
 
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