Finance & Enjoyment Blog

Rules for Your Car Tax Deduction -

A vehicle that is used for both personal and business is tax deductible for business related purposes only. There is no minimum in regards to the percentage of business use for the automobile and whether the vehicle was financed, purchased outright or leased does not matter. Either a standard mileage rate or the actual costs can be used to calculate this deduction. There are, however, several rules one must follow when taking these deductions, and only one expense method may be used.

  • Rule # 1: Adequate written records must be kept. These should provide starting and stopping points, mileage, dates, and the business purpose of the trip. It is most common, and also the easiest to keep these records in a journal or notebook that is left in the car. Alternatively, if you own a GPS that has recording capabilities, it may be used instead of a written copy. Be warned, for third party tax preparation, it is much easier to have written documentation.
  • Rule #2: Choose a method, either actual costs or a standard mileage rate. With the actual costs; depreciation, maintenance, taxes, interest, and fuel are combined to form the expense. The standard mileage rate is a much simpler way to calculate expense, as it is the miles driven multiplied by a standard amount set by the IRS. As of January, 2011, the standard mileage rate is .51 cents per mile driven.
  • Rule #3: If a business owner wants to use the standard mileage rate, this decision must be made in the first year the vehicle is available for use. If actual costs become greater than the standard rate in later years, then the owner is able to change methods as long as the vehicle is not leased. Also, if the actual cost route is chosen, a wise idea would be to attain a credit card, and use it solely for automobile related expenses. That way, dividing up the expenses into categories at year end becomes a simple procedure rather than a search for records and receipts.
  • Rule #4: If the vehicle is used solely for business purposes, then it qualifies for section 179 deduction. This means that the full cost of the vehicle may be depreciated in a single year, thus providing a great deductible cost as long as there is income to offset it. It doesn’t matter when the car is bought, whether it be January 1st or December 31st for this deduction. The section 179 deduction however, does not apply to any vehicles that are also used for personal use.

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