Actual auto expenses or standard mileage rate? Which business deduction method will cut your taxes more?
Has all the attention given Google's driverless car got you thinking about your auto? If you're a business owner, it could be the perfect vehicle.
It has no steering wheel, accelerator or brake pedal to mess with. You use your smartphone or tablet app to summon the vehicle, set your route, get in and go. Then just sit back and enjoy as the Google machine takes you to your destination.
If it's to a business meeting, you can use the time you otherwise would be driving to polish your presentation. Or you can call your spouse to ask him or her to pick up dinner or the cleaning or the kids. Or you can just relax so you'll be in the best frame of mind for your important professional encounter.
Of course, it will be a while before the Google auto is available on a large scale. And there's no indication yet as to what one will cost.
So for now, all of us who drive for business purposes are stuck with our current technology.
Deducting business travel: Regardless of whether we're driving a high-tech auto like the Google-mobile or our 21st century versions, we still have the tax deduction for business use of our autos.
But sometimes we don't make maximize this tax break.
Business filers generally have a choice in deciding how to deduct their miles, the standard mileage deduction or the write-off using actual auto expenses.
Making the correct choice could mean more tax savings.
Actual auto expenses: As the name indicates, here you keep track of your vehicle's actual expenses -- another reason to have a good business record keeping system.
Allowable auto costs include gas, oil, tolls, parking fees, insurance, repairs, registration costs, garage rent, tires, repairs, depreciation or lease payments and, of course, mileage.
If you use your car exclusively for business purposes, add all these up and that's what it costs to use it to do business and what you can deduct.
If, however, you use your auto for business and personal driving, you can only deduct the portion related to your work. You must divide your expenses between business and personal use.
You can do this, says the Internal Revenue Service, based on the miles driven for each purpose. Here's an example:
You drive your car 20,000 miles during the year: 12,000 miles for business and 8,000 miles for personal use. You can claim only 60 percent (12,000 ÷ 20,000) of the cost of operating your car as a business expense.
The percentage also applies to a tax deduction that most of us can't claim any more, auto loan interest.
If you are self-employed, use your car in your business and are paying off a loan on that vehicle, you can deduct that part of the interest expense that represents your business use of the car. In the example above, that's a deduction of 60 percent of the vehicle loan's interest.
Standard mileage method: The other auto expense deduction method, claiming the standard mileage deduction rate, is one that lots of us use because it's easier.
This rate is adjusted annually for miles driven specifically for business. The depreciation component is factored into the rate that the IRS releases each fall.
For 2014 business use of your car, you can claim 56 cents per business mile. Just take all the miles you drove for your job and multiply it by that amount.
Yes, you still have to track your mileage, but don't have to worry about that extraneous auto stuff.
Do, however, hang onto parking and toll receipts. Under the standard mileage rate deduction method you still can add to your deduction amount any parking fees and tolls incurred for business purposes. The IRS makes this exception since these rates tend to vary regionally.
Choose carefully: You need to be a careful and comparative shopper when it comes to deciding which auto deduction method to use.
Many folks automatically think that the more complicated actual expenses method will automatically provide a bigger tax deduction. Not necessarily.
As in other tax situations, you or your tax adviser need to run the numbers -- which means hanging onto to all those auto receipts so you can do the math.
Also note that if this is the first time you're using your car for business, you might want to opt for claiming the standard mileage rate anyway. Why? Because it gives you more choice down the tax road.
If you opt for the actual expenses method initially, you're stuck with it for as long as you use that vehicle. This method might be right for you if you expect several years of depreciating your vehicle will bring down the tax bite. But if that changes, too bad. You're still you're stuck with claiming actual expenses.
If, however you claim the standard mileage rate when your car is first available for business use, you can switch to the actual expenses method later if that's a good move.
But if you started using the standard mileage rate for a leased car, you can't change to the actual auto expenses method during the lease term.
So talk with your tax professional and make the appropriate auto expense deduction choice for your business and your tax situation.
And maybe by the time Google self-driving cars are on all of America's roads, tax reform will be a reality, too, making all the auto deduction issues much easier!
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