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Figure out the best way to deduct auto expenses.
If you use your car for work either in your own business or as an employee of a company, you can deduct some of your car-related expenses. Exactly what you can deduct depends on how you calculate your deduction. The IRS offers you two choices:
1. Use the standard per-business-mile allowance. For 2004, the standard mileage rate is 37.5 cents per mile, up from 36 cents per mile in 2003.
2. Or, deduct the actual expenses, keeping track of all of your expenses for gas, oil, tires, maintenance, and insurance.
You have to choose one method or the other, depending on how you use the car, how you have handled expenses on previous returns, and what works out best for you.
Note that commuting expenses between your home and work are usually considered a personal expense and are therefore not deductible.
Using the Standard Mileage Rate
You can use the standard mileage rate method for a given car if:
-You own or lease the car yourself
-You are not using the car as a taxi or other vehicle for hire
-You are not using more than one vehicle simultaneously in your business (such as when
you have a fleet of cars)
-You have never claimed an accelerated method of depreciation or taken a section 179 expense deduction for this particular car
If you own the car, and you want to use the standard mileage rate method, you must use the standard mileage method in the first year you start using this car for business purposes. Thereafter, you can switch to the actual expenses method, if you want.
If you lease the car and choose the standard mileage method, you have to stick with this method for the entire lease period of the car.
If you take the standard mileage deduction, you may not deduct car expenses such as gas and repairs, but you may deduct your business-related payments for:
- Parking fees and tolls
- Personal property taxes on your car (often part of your registration fees)
- Interest on your car loan (only the portion that can be allocated to the business use of your car), if you are self-employed
Figuring Actual Expenses
You can use this method in any year you use your car for business, even if you have used the standard mileage rate in earlier years.
Examples of actual car expenses that you can deduct:
-Depreciation
-Gas
-Insurance
-Lease payments
-Maintenance
-Oil
-Registration costs
-Repairs
-Tires
Deciding on the Best Method for You
Calculate the standard mileage deduction, then calculate your actual deductible expenses, and see which one is higher. The bigger the deduction, the lower your taxes.
For more information about deducting your business automobile expenses, see IRS Tax Topic 510: Business Use of Car.
One Last Wrinkle: Depreciation
Depreciation is the gradual decline in value as a car gets older. In general, you use depreciation to recover the cost of any real property or personal property that:
-You use in business or hold for the production of income
-Has a determinable useful life of more than one year
-Either wears out, becomes obsolete, or loses its value due to natural causes
Here are the twists and turns of deducting depreciation on your vehicle:
1. If you started out using the standard mileage rate to deduct your expenses for a particular car, you can switch to the actual expenses method in a later year. But you'll have to use the straight-line depreciation method on your car instead of an accelerated method.
2. For most cars, there is a maximum amount of depreciation that you can take every year, and you're limited to deducting only the part that's attributed to your business usage of the car. For example, if you use your car 60% of the time for business purposes and 40% for personal purposes, you can deduct only 60% of the maximum depreciation amount.
3. You must use the vehicle more than 50% of the time for business in order to qualify to take depreciation on it.
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