THESE DAYS, business owners and consumers are looking to keep every earned dollar they can. Although most people dread tax season, it actually has potential to be beneficial for you and your business. Almost everyone drives a car. Do you ever drive your car for business? If so, you can probably make deductions on it.
There are two choices for claiming deductions:
- Actual Cost Method. Deduct the actual business-related costs of gas, oil, lubrication, repairs, tires, supplies, parking, tolls, drivers' salaries, and depreciation.
- Standard Mileage Method. Use the standard mileage deduction in 2012 and simply multiply 55.5 cents by the number of business miles traveled during the year. Your actual parking fees and tolls are deducted separately under this method.
Which Method Is Better?
For some taxpayers, using the standard mileage rate produces a larger deduction. Others fare better tax-wise by deducting actual expenses.
Tip: The actual cost method allows you to claim accelerated depreciation on your car, subject to limits and restrictions not discussed here.
The standard mileage amount includes an allowance for depreciation. Opting for the standard mileage method allows you to bypass certain limits and restrictions and is simpler—but it's often less advantageous in dollar terms.
Caution: The standard rate may understate your costs, especially if you use the car 100% for business, or close to that percentage.
Generally, the standard mileage method benefits taxpayers who have less expensive cars or who travel a large number of business miles.
How to Make Tax Time Easier
Keep careful records of your travel expenses and record your mileage in a logbook. If you don't know the number of miles driven and the total amount you spent on the car, you won't be able to determine which of the two options is more advantageous for you.
Furthermore, the tax law requires that you keep travel expense records and that you give information on your return showing business versus personal use. If you use the actual cost method for your auto deductions, you must keep receipts.
Tip: Consider using a separate credit card for business, to simplify your recordkeeping.
Tip: You can also deduct the interest you pay to finance a business-use car if you're self-employed.
Note: Self-employed individuals and employees who use their cars for business can deduct auto expenses if they either (1) don't get reimbursed, or (2) are reimbursed under an employer's "non-accountable" reimbursement plan. In the case of employees, expenses are deductible to the extent that auto expenses (together with other "miscellaneous itemized deductions") exceed 2% of adjusted gross income.
