Tax Tips
Deducting Business Car Expenses - December 2004
Richard Scrivanich - Partner
Deducting Business Car Expenses
Operating a car for business can be expensive, so it’s important to take advantage of the available tax breaks. If you use a car for business purposes, here’s what you need to know.
Defining business miles
The IRS defines business use as the miles you drive your car between two business locations. If, for example, you travel between your office and the office of a customer or between two jobs, your travel is considered deductible business expense. If you have a regular place of business, the cost of traveling between your home and a temporary work site is deductible, regardless of the distance traveled. Commuting from your home to your regular place of business is not deductible. However, for self-employed workers who work from a home office, the cost of driving from home to other work locations is a deductible business expense.
Computing qualified expenses
There are two methods you can use to compute deductible expenses: the standard mileage rate or the actual cost method. With the standard mileage rate, you claim a flat amount for each business mile you drive. This rate is set by the IRS and adjusted annually. The standard mileage rate for 2004 is 37.5 cents a mile, up from 36 cents in 2003. To use this method, multiply the number of business miles driven during the year by the standard mileage rate.
To use the actual expenses method, calculate all vehicle expenses, including gasoline and oil, tires, battery, repairs, driver’s license and car registration fees, car insurance, and depreciation. To arrive at the deductible amount, multiply your total actual costs by the percentage of business use for the vehicle based on business miles as a percentage of total miles.
Note that business-related tolls and parking fees are deductible in full regardless of which method you use.
New 2004
Previously, taxpayers using more than one vehicle at a time for business could not use the standard mileage rate. The IRS has announced that beginning in 2004 taxpayers who use no more than four vehicles for business purposes during the tax year may use the standard mileage rate.
Which method is best for you?
It’s important to consider carefully whether to deduct the standard mileage rate or your actual costs. The method you choose for deducting business auto expenses for the year you place the car in service affects your options in later years.
If you choose to use the standard mileage method in the first year, you can switch to the actual cost method in later years. However, the reverse does not apply. When you use the actual cost method in the first year, you cannot switch to the standard mileage for that car in any subsequent year.
Also, if you lease your can and choose the standard mileage method, you must use that method for the entire lease term.
While the standard mileage rate is generally easier to use and doesn’t require as many detailed records, the actual cost method may result in a larger and/or accelerated deduction, particularly with a relatively expensive car. This is especially true in light of the liberalized depreciation rules of recent years.
Regardless of the method you use, certain recordkeeping requirements apply. The best way to keep track of the necessary information is to keep a log handy to record the date, your business miles, the destination, and the business purpose of your trip.
Whether you are considering the purchase of a vehicle for business use, have begun to use an existing vehicle for business purposes, or would like to be sure of the best tax treatment for your existing business vehicle, please call us so we can help you receive the best possible deduction.
If you have any questions regarding deducting business car expenses or any other tax matter, please give me a call at (562) 698-9891.
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