Small Business Vehicle Deduction
First, the general rule: the IRS says your vehicle is deductible to the
extent you use it for business.
So, if you drive your car 100% for business, all
car-related expenses are deductible. But if you use it less than 100%
for business, do not despair. Less-than-100% use is very typical among
small business owners and the self-employed -- you'll still come out way
ahead by keeping good vehicle expense records. For example, if you
drive your car 75% for business, then you get to deduct 75% of your
vehicle expenses. Now to the fun part:
Reporting Auto Expenses
There are two small business tax tips for reporting your car expenses:
- Actual Expense Method
- Mileage Method
With the Actual Expense Method, you have to keep track of all your vehicle
related expenses, such as:
- gasoline
- oil
- maintenance & repairs
- insurance
- license & registration
- wash & wax
- supplies & equipment
- depreciation expense (including Section 179 deduction)
- lease payments
- loan interest
- state and local taxes
So you add up all those deductions and multiply the total by your business use percentage, which is determined by
dividing business miles by total miles driven. The Mileage Method
works like this: instead of tracking all the actual expenses listed above,
you only need the number of business miles driven, which is multiplied by
the standard mileage rate published each year by the IRS.
For 2003, the business mileage deduction rate is 36
cents per mile. For 2004, the business mileage rate is 37.5
cents per mile.
If you drove your car 10,000 miles in 2003, your deduction is $3,600 -- regardless of what your actual expenses might have been. NOTE: There are 2 actual expenses that are also deductible under the Mileage Method -- interest and taxes.
Now for the obvious question: Which auto
deduction method is better -- Actual or Mileage?Well, here's how I look at it. If you want to get the highest deduction, you should "run the
numbers" under both methods and then use whichever method results in the
higher deduction. You are allowed to pick whichever method you
want. But once you pick a method, be careful to follow the rules
on "switching" from one method to the other: You can switch from the
Mileage Method to the Actual Method, but generally are not allowed to
switch from the Actual Method to the Mileage Method. Having said
that, let's be practical. If you hate recordkeeping, use the Mileage
Method. It's much simpler and faster. You won't have to keep all those
receipts. Even the Mileage Method requires some recordkeeping,
however. You should keep a log that documents the business use of the
vehicle. Here are 3 IRS-approved car logs:
Daily Log. Yep, you just record all business miles for all 365 days of the year.
90-Day Log. Here's a little-known rule -- instead of keeping mileage records for the entire year,
you can get by with just a representative portion of the year -- and a 90-day
period is considered an adequate representation of the entire year
So you would keep a Daily Log for a 3-month period, say January through March. To get your annual mileage total, you multiply the 3-month total by 4.
One-week Log. Here's another short-cut: The IRS also allows you to keep a log for just the first week of each month. Then you multiply that week's mileage by 4 to get the monthly total. Regardless of which
method you use, there's a goldmine of deductions sitting right there in
the garage.
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