Gregory S. DuPont
In the Driver's Seat: Tax Deductions
We are truly a society on wheels. Business often requires traveling, and that travel may take the form of driving. If you use your car for business, you may be entitled to some tax deductions if you meet certain rules and limitations.
If you are self-employed, or an employee who is reimbursed under an employer’s plan that does not require you to account for expenses (or if not reimbursed by an employer’s plan), you may be eligible to deduct business expenses for using your automobile. If you are an employee, you may deduct expenses only to the extent that they exceed 2% of your adjusted gross income (AGI).
Choices: Standard Deduction or Actual Expenses?
When using your car for business purposes, you can choose either a standard mileage allowance (57.5 cents per mile in 2015) or a deduction of actual business automobile use expenses. The actual expenses would include oil, gas, repairs, registration, depreciation (subject to annual limits), and insurance. With either choice, you may deduct tolls and parking fees.
The standard mileage deduction may be of more benefit if you travel extensively or have a less expensive model of car. However, the standard deduction may understate the actual costs, particularly if you use your car 100% for business purposes. Choosing the best method of deduction depends on your own particular situation.
Another strategy could be to opt for the standard mileage rate during the first year in which you use your car for business purposes, you could then switch to the actual expense method at a later time.
Depreciation: When and How
The Internal Revenue Code (IRC) Section 280F applies limits to annual depreciation deductions. Therefore, if you buy a high-priced car, even if you used it 100% for business, you would be subject to limited depreciation deductions.
If 50%-100% of the use of your car is for business, you may be able to claim only a percentage of the available depreciation amount. When using your car only 50% or less for business, you would be ineligible to claim accelerated depreciation.
If the business use of your car decreases to 50% or less in a given tax year— and you had claimed accelerated depreciation in the previous year—you would be required to pay a recapture tax on that claimed accelerated depreciation.
Three Steps Toward Increasing Deductions
1) Maintain thorough and accurate records. Keeping good records on the total dollar amount you
spend on your car (and related expenses), as well as the number of business miles you drive, will help you make a better informed decision on which method to choose.
The Internal Revenue Service (IRS) requires taxpayers to keep travel expense records and to provide information on tax returns detailing business versus personal use. Another requirement, particularly in the case of actual expense deductions, is to keep receipts concerning all expenses. Remember, if you use the standard mileage deduction, you’ll need to keep receipts for tolls and parking fees.
2) Keep a mileage log when using either the standard mileage deduction or the actual expense method. [Note: The first trip each day from home to work and from work to home at the end of the day are nondeductible commuting expenses, and are generally not counted.]
3) For the self-employed taxpayer—deduct the interest on any loan used to finance the purchase of a car used for business purposes.
In the event that you use your car only partially for business reasons, only the business percentage of the interest may be deducted; you may no longer deduct personal interest.
As more and more jobs require travel, it could be to your benefit to seek professional advice in order to avail yourself of the deductions applicable to your individual situation.