Auto expenses used for a business are usually tax-deductible. This means that if you use your car for your business operations, whether you own a small-scale business or are self-employed with a home office, you can deduct the accumulated auto expenses from your tax dues. If you hardly know how to go about this, let this article guide you.
- Make a mileage log. A mileage log is necessary in determining your mileage for a specific tax year. Although tax payers are expected to record every mile for every business trip, this isn’t always followed. In any case, you at least need to record your business trips, purpose, (e.g. shopping for office supplies, business meetings, home service, etc.), date, and a rough estimate of your mileage for a one-week period.
Multiply the mileage by four to get a good estimation of your mileage for a month. The monthly mileage should then be multiplied by four to derive the mileage for that year. You can also try to use the three-month method, in which case, you need get your mileage for a three-month period and multiply it also by four. The result will be your mileage for the year. Another method involves subtracting your mileage on the first day of the year from the mileage on the last day of the year to get the total mileage you used the entire year. This works if your car is used for purely business purposes.
- Report the auto expenses using the Mileage Method. Remember that the Mileage Method is only way of reporting your auto expenses (the other one will be discussed later in this article). Your mileage log will be needed here, as the IRS won’t allow you to use this method unless you have that precious log. In this method, your total mileage will be multiplied by the IRS-determined standard mileage rate. The standard mileage rate changes every year, so make sure to check with the IRS as you do your computation. In 2010, the standard mileage rate is 50 cents for every mile. So if you drive 12,768 miles, your tax deduction will amount to $6,384 (12,786 x .50 = 6,384).
- Keep a record of your vehicle-related expenses. This record will be necessary in the second method of reporting tax deductions. Vehicle-related expenses include gasoline, parking fee, maintenance, repairs, insurance, registration, loan, license, and equipment installation. Make sure to collect your receipts, which you will later use in your calculation.
- Report the auto expenses using the Actual Expenses method. Unlike the Mileage Method, the Actual Expenses method allows you to make your deductions based on the accumulated vehicle-related expenses. To determine your deduction, add up your expenses and multiply the amount by the total percentage of business use (business use is determined by dividing the miles used for business by your total miles).
Finally, choose which method is more favorable to you. Calculate your deductions using the two methods and find out which of the two can earn more deductions. Should you decide to switch, remember that switching is only allowed from Mileage Method to Actual Expense method. Switching from Actual Method to Mileage Method is not allowed.