For most of us, a car is an important part of our daily lives and is essential to our transportation. But, for those of you operating your own businesses, did you know your car is also a good source of TaxLoopholes?
The IRS allows you to take a deduction for automobile operating expenses, when that automobile is being used for business purposes. The business does not have to own the car, but you do have to carefully document the expenses. There are two ways to take expenses: actual expenses, or a mileage allowance. With actual expenses, you need to track expenses such as:
- Gas and oil
- License and registration
- Lease payments
- Garage costs (if you rent space to store your vehicle)
You may take a pro-rata portion of these expenses based on the time the vehicle was used for business purposes. So, if you use your vehicle 50 percent of the time on business, then 50 percent of these items would become deductible!
The second alternative is to track your business-related mileage and take a straight deduction of that amount. The mileage rate this year has been 48.5 cents per mile and given gas prices, we can expect to see it stay the same or even increase for 2008. To take this deduction safely, keep a small notebook in your car and record your mileage for at least a 1-3 month period. That will give you a baseline of average mileage that you can extrapolate from there. This is one area the IRS loves to challenge, so make sure you’ve got some kind of proof for this deduction.
Now here’s a TaxLoopholes tip: TaxLoopholes Tip! The IRS does not allow you to deduct miles spent commuting to and from your work. However, if you have a home office, your commute may be as simple as walking down the hall! That means that every time you leave your house on business-related purposes, the mileage becomes deductible – including the drive to your outside office!
Which Deduction Strategy is Better?
Whether you elect the mileage or actual expense deduction will depend mostly on your vehicle’s age and your driving habits. A new car depreciates very quickly. You’ll have a great deduction to begin with, but after about 3 years that deduction will be minimal. But if you’re the type of driver who loves to drive a new car every two years, this method may work for you.
If you like to hang onto your vehicle though the mileage method might be better. According to a survey done by the Department of Energy the average American vehicle is driven over 11,400 miles per year. At 48.5 cents per mile, that is a potential deduction of over $5,500 per year! Even if you only use your vehicle for business purposes 30 percent of the time, you still have a potential mileage deduction of almost $1,900 per year, every year.
One other thing to bear in mind here is that once you have selected a deduction method you have to stay with it. The IRS won’t let you use MACRS for a couple of years and then switch to the mileage deduction method.