If you use a car for business, you get the benefit of tax deductions.
There are two choices for claiming deductions:
- Deduct the actual business-related costs of gas, oil, lubrication, repairs, tires, supplies, parking, tolls, drivers’ salaries, and depreciation.
- Use the standard mileage deduction and simply multiply 51 cents for 2011 travel (2010’s rate was 50 cents) by the number of business miles traveled during the year. Your actual parking fees and tolls are separately deductible under this method.
Which Method Is Better?
For some taxpayers, 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. If we opt for the standard mileage method, it allows you to bypass the limits and restrictions and it’s 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. We won’t be able to determine which of the two options is better for you if you don’t know the number of miles driven and the total amount you spent on the car.
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 we 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-employeds 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.
We will help you determine the best deduction method for your business-use car. Let us know if you have any questions about which records to keep.
970.668.0772, 970.668.0434, 888.668.0772
firstname.lastname@example.org – Colorado Tax Coach
Photo Courtesy of Bob Berwyn, Summit County Citizens Voice