| Deducting Your Auto Expenses | | | | second car 100% for business? Yes! That's because |
| Auto deductions are a very complex topic. So, to | | | | your business use is based on the business miles that |
| clarify, we are not going to attempt to cover all of the | | | | you drive. |
| intricacies of the subject. Instead, we will cover some | | | | But, can you still get a net benefit of using two cars for |
| of the most-used provisions and provide you with a | | | | business even if you use the second car less than |
| better understanding of some of the associated | | | | 100% percent for business? Again, the answer is yes. |
| issues. | | | | Part of the benefit is that you can depreciate what is |
| In keeping with one of our primary strategies, what we | | | | called the "basis" of your car. Because the "second" |
| are interested in doing with our automobiles is to | | | | car was used for personal purposes, you determine its |
| convert as much of their use as possible to legitimate | | | | basis on the day that you convert the car to business |
| business purposes. | | | | use. On that day, you determine its basis by comparing |
| That's because personal auto use is not deductible. As | | | | cost and market value of the car and using the lower |
| a result, the object here is to maximize the amount of | | | | of the two. |
| auto use you can attribute to business purposes and | | | | Here, the cost is what you paid for the car originally |
| document that usage properly. | | | | plus any capital improvements that you have made to |
| Strategy One: The Actual Method vs. the Standard | | | | it. For example, a capital improvement would be any |
| Method | | | | amounts you spend to re-build or re-place the engine. |
| Tax Deductions | | | | So, if you purchased the car several years ago for |
| There are two methods that you can use to deduct | | | | $8,000, and today it has a retail book value of $5,000, |
| your automobile usage. For the most part, you can | | | | and you haven't made any capital improvements, your |
| choose the method that provides the greatest method | | | | basis for computing depreciation is $5,000. |
| to you. The first method is the "actual"(expense) | | | | Let's look at an example (thanks to Sandy Botkin, |
| method. The other is the "IRS" (standard) method. | | | | C.P.A., Esq.) |
| The Actual Method. | | | | Two Cars One car Car 1 Car 2 |
| This method requires that you keep track of your | | | | Business/Personal use |
| actual auto expenses and then compute the | | | | Mileage for Business 22,000 18,000 4,000 |
| percentage of business use. So, you can deduct the | | | | Total Mileage for Year 24,000 20,000 7,800 |
| business percentage of all operating expenses such | | | | % Business Use 92% 90% 51% |
| as gasoline, insurance, licenses, maintenance, cleaning, | | | | Deduction Calculations Gas and Oil 1,540 1,260 280. |
| etc. | | | | Insurance 800 800 600. |
| Your parking fees and tolls can be deducted in full. | | | | Repairs and Maintenance 600 600 600. |
| One simple way to track your individual expenses is to | | | | Tag and Licenses 100 100 80. |
| put them on your company credit card. That way, your | | | | Wash and Wax 230 230 202. |
| monthly statement will provide you with a breakdown | | | | Other 50 50 50. |
| of these costs. You should also put them into a tax | | | | Total Op. Expenses 3,320 3,040 1,812. |
| diary to have the most complete documentation | | | | Business Use % x 92% x 90% x 51%. |
| possible. | | | | Business Total 3,054 2,736 924. |
| Most accountants are comfortable if you give them an | | | | Depreciation 2,815 2,754 1,540. |
| approximation of the percentage of time you use your | | | | Total Deductions 5,869 5,490 2,464. |
| auto for business. Your daily diary will help to | | | | Extra Deductions $2,085.00. |
| substantiate this amount. I often hear them suggest a | | | | Note: Assuming value of each car is $16,000. |
| figure between 70% and 90% if you are a full time | | | | Tax Help |
| business person. | | | | The point here is that simply by converting some of |
| As a result, you will attribute that figure (say 80%) as a | | | | your usage of your second car over to business use, |
| business deduction and the balance is a personal | | | | you can get far more benefit than the 2% of the |
| expense. | | | | business usage that you "give up" on your first car. |
| Note: if you use this method, you cannot switch to the | | | | The lesson, enroll the use of your second family car |
| standard method later on. | | | | into the business. |
| The Standard method. | | | | Note: There is one disadvantage of the "two car" |
| The Standard Method involves tracking your actual | | | | strategy. You cannot use the simplified tracking |
| business mileage use and multiplying the number of | | | | technique outlined above. You must track the actual |
| business miles you drive by the IRS rate. | | | | usage for each business trip. |
| There are three different ways to track your mileage. | | | | Change to the Old Rule: The old rule allowed the |
| You may choose the method your prefer. | | | | maximum standard rate for only the first 15,000 |
| Strategy 1a. The three ways of tracking your miles. | | | | business miles an auto was driven during a year. And, |
| Method #1. This is called the Every Day, Every Trip | | | | once the auto had accumulated 60,000 business miles |
| method. This is the most complete method. It requires | | | | at the maximum IRS optional rate that automobile was |
| you to track each and every trip that you take for | | | | considered fully depreciated and you had to switch to |
| business purposes. You must notate your miles at the | | | | 14 cents per mile. Under the new rules, the per mile |
| beginning of each business trip and again when the trip | | | | rate applies to all business miles. There is no 15,000 |
| is completed. Then, subtract the difference and you've | | | | mile annual limit or 60,000 mile maximum. |
| got your miles traveled. It is best if you actually keep | | | | Strategy 3. Buying vs. Leasing Your Auto: |
| the notation of the beginning miles and the ending | | | | The rule for tax purposes is: Buy your cars, don't lease |
| mileage in your diary. If you want a really thorough | | | | them, to obtain the best after-tax return on your car |
| record, you should document your business use and | | | | investment. |
| personal use each day. But, let's face it, most of us | | | | Reasoning: The after-tax cost is greater to lease than |
| have better things to do with our time. | | | | to purchase both business and personal cars. The |
| Method #2. Another method that is acceptable to the | | | | difference is about 10% in favor of purchasing. |
| I.R.S. is to track each trip you take for a period of | | | | Contrast this with a wealth building concept. You |
| three months. The three-month period is considered a | | | | should buy appreciating assets and lease depreciating |
| good reflection of your average auto usage for tax | | | | assets. Under this rule, it would seem that typically, |
| purposes. Then, all you need to do at the end of the | | | | your better option overall is to lease your vehicle |
| year is multiply this number by four to determine yearly | | | | because it is probably a depreciating asset. |
| usage. | | | | Note: This might not be true for certain collector's cars, |
| Tax Strategies, Tips, and Deductions | | | | etc. that appreciate over time. |
| Method #3. The "one week per month method". With | | | | The bigger picture: |
| this method, you track each of your business trips | | | | If you plan to drive the car for two years or less, lease |
| during say, the first week of the month. You repeat | | | | it. If you plan to keep it for four years or more, |
| this each month and take an average of your mileage | | | | purchase it. In between two and four years, it's a |
| as your deduction. | | | | tossup. |
| 2002 Rates: This year, the mileage deduction is 36.5 | | | | So how do you reconcile these conflicting rules? Here |
| cents per mile. | | | | are a few more guidelines that set out the non-tax |
| Simplified Technique: | | | | leasing advantages. |
| There is a short cut to tracking your mileage. Most | | | | Leasing is a good idea if you meet a few of the |
| people have a certain number of places that the travel | | | | underlying criteria: |
| to regularly. It may be certain of your client's offices or | | | | 1. Your financial income does not vary from year to |
| a hotel where you meet with people regularly. You can | | | | year. |
| determine the miles once, and keep it on file. For | | | | 2. It is important to drive a new vehicle in your business. |
| example, keep a record in your diary that it is 55 miles | | | | 3. You don't like to own cars for many years. |
| round trip to a particular client's office. Then, each time | | | | 4. You generally drive less than 15,000 miles per year. |
| you travel there, simply use the already established | | | | 5. Your credit rating could use some improvement. |
| mileage in your diary. | | | | 6. You hate auto repairs and dislike leaving your car at |
| Hot Tip: | | | | the "shop". |
| As outlined above, most people track the mileage that | | | | 7. You are an employee who uses a car for business |
| we incur for business purposes and forget about the | | | | and don't have the money to purchase the car with |
| mileage traveled for personal use. As a result, the | | | | cash. |
| assumption is that you are driving for personal reasons, | | | | 8. You quickly tire of the same car. |
| and you only record a trip if it is for business reasons. | | | | Strategy 4. Identify supplies and equipment used to |
| To use a computer term, the "default" is personal | | | | maintain your business car. |
| mileage and we only get to deduct what we actually | | | | Look around your basement and garage, or wherever |
| track. If you forget to track a particular trip, you lose | | | | you store tools and cleaning supplies. Make a list of the |
| the deduction. | | | | items you use on your car. You will probably find a |
| There is an alternative that may prove easier for you. | | | | battery charger, battery cables, and maybe even a |
| Make your "default" business usage, and only track the | | | | battery tester, and various other tools. You can deduct |
| personal miles. So long as you do this consistently, this | | | | these items two ways: If the cost of the tool is more |
| is perfectly acceptable to the I.R.S. and, for those of us | | | | than $100, it should be capitalized and depreciated. If |
| who use our cars mostly for business, this method | | | | the cost is less than $100 for an individual item or group |
| substantially limits the amount of record keeping we | | | | of small tools, its normal to expense such items in the |
| must do. | | | | year they are purchased. |
| Whether you use the actual method or the standard | | | | Proof: Since you will be sorting through old acquisitions, |
| method is a decision that you should make after | | | | it's likely you won't have receipts. Take photographs |
| consulting with your tax professional. | | | | because they can represent reasonable substitute |
| Strategy 2: The Two Car Strategy. | | | | evidence. |
| The purpose of this strategy is for you to get a | | | | Strategy 5. Deduct the Cost of Garaging Your Car |
| greater tax benefit if you already have two cars: one | | | | If you must pay separately for the cost of keeping |
| for personal use and one for business. So, if you | | | | your car in a garage, you can deduct this cost as a |
| already have two cars in your family, use this strategy | | | | business expense. |
| to your advantage, but don't go out and purchase a | | | | Your call to action. |
| second car just to implement it. This strategy takes | | | | Decide on the best way and most convenient way for |
| into account not only the typical costs associated with | | | | you to track your auto expenses. Which of the four |
| auto usage, but also the depreciation expense as well. | | | | methods is most practical and beneficial to you. |
| You can imagine that if you only drive one car for | | | | Review the different ways with your accountant or |
| business, the maximum business use percentage you | | | | C.P.A. Also, determine if you can take advantage of |
| can achieve is 100 percent. If you drive two cars for | | | | the two-car strategy. |
| business, is it possible to drive both the first and | | | | |