The biggest expense – business use of your vehicle

This blog segment goes into depth about the expenses connected with the business use of your car so you do not miss any of these valuable deductions.

If you use your car for business purposes, you can deduct car expenses.  You generally can use one of two methods to figure your deductible expenses: actual expenses or the standard mileage rate.

You may be able to use the standard mileage rate to figure the deductible costs of operating you car for business purposes.  The 2011 rate for business miles is 51 cents per mile from January 1 to June 30 and 55 ½ cents per mile from July 1 through December 31.

If you want to use the standard mileage rate for a car you own, you must choose to use it in the first year the car is available for use in your business.  Then in later years, you can choose to use either the standard mileage rate or actual expenses.

In addition to using the standard mileage rate, you can deduct any business–related parking fees and tolls.

If you do not use the standard mileage rate, you can deduct your actual car expenses.

For clients who qualify I figure your deduction both ways to see which one gives you a larger deduction.

Actual car expenses include the costs of:

Depreciation

Garage rent

Gas

Insurance

Lease payments

Interest payments

Licenses

Oil

Parking fees

Registration fees

Repairs

Tires

Tolls

Car Washes

I advise my clients to keep the actual receipts for all of their vehicle expenses and the actual mileage they drove during the year.

At the beginning and end of the year you can jot down the mileage of your car.  With the actual expenses and actual mileage I can compare which method will save you the most money.

The IRS would also like for you to keep a log of each of your business trips. The log would include the mileage of each business trip, the date, the names of the people involved and the purpose of the trip.

The amount of deduction for actual expenses depends on the percentage you use your vehicle for business. 

For example, let’s say you drove 20,000 miles last year and 16,000 miles was for business.  Therefore, 80% (16,000/20,000 = 80%) was for business.  If you incurred $10,000 expenses on your car you can deduct $8,000 as a business expense.

 Let’s use this same example, of 80% business use, to look at a standard mileage allowance deduction.

From January 1^st through June 30^th you drove 7,500 miles and from July 1^st through December 31^st you drove 8,500 miles Using the standard mileage rate your deduction would be 7,500 miles X 51 cents per mile = $3,825.00 plus 8,500 miles X 55.5 cents per mile = $4,717.50. The total mileage expense, using the standard mileage rate, would be $8,542.50.

Comparing the standard mileage rate deduction of $8,542.50 with the actual expenses deduction of $8,000, we would choose the standard mileage rate expense deduction because it is larger and would save you more money on your tax return.

Your business expenses are an important consideration because not only do they affect your income taxes, but also your self-employment taxes. You need to make sure you are accounting for every business expense so you don’t overpay your taxes.