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The Secret Tax Deduction Businesses Don’t Use Enough
Published on Apr 8, 2013
Read 'The Secret Tax Deduction Businesses Don’t Use Enough' at 'Time to Start Up,' the small business blog by BizFilings.
As discussed in previous posts, incorporating a business has its perks, especially when it comes to tax deductions. Whether you are self-employed, an LLC or an S-Corporation, the cost of operating a vehicle can be a tax-deductible expense when it’s used for a business purpose.
The Internal Revenue Service (IRS) defines a business purpose as driving from your place of employment to another work site. This could be to meet with a client, go to a business meeting or attend a conference, trade show or other business related event.
On the down side, commuting from your home to the office doesn't count as a business purpose unless you have an office in your home. If you do have a home office, then traveling from home to meet with a client or conduct business is in fact tax-deductible.
How to Deduct a Vehicle Expense
There are two methods for computing the amount of your deductible car expense -- the standard mileage rate method, or the actual expense method.
Use of the standard mileage rate applies when the vehicle is used for both personal and business purposes. To qualify, the IRS says you must:
Own or lease the car, and use it for business purposes in the first year of possession
Use the standard mileage rate method for the entire lease period, including renewals
However, there are a few restrictions in that you cannot use the standard mileage rate if the vehicle is used to transport persons or property for compensation or hire. Also, you can’t use the standard mileage rate if your business operates five or more vehicles at the same time. In 2013, the standard mileage rate is 56.5 cents per business mile driven.
In applying the actual expense method, you must determine what it actually costs to operate the car specifically for the business. This include all costs – gas, oil, repairs, tires, insurance, registration fees, licenses and depreciation (or lease payments) attributable to the portion of the total miles driven for business purposes. Furthermore, it’s important to note that when you own the vehicle you can deduct depreciation, and when you lease the vehicle you can deduct the lease payments.
In either case, expenses for parking fees and tolls attributable to business use are separately deductible, whether you use the standard mileage rate or actual expenses.
Whichever method you use, be sure to keep meticulous records throughout the year with detailed information including the purpose for various trips, which clients you were visiting or the specific projects you were working on. This way when April rolls around, all of that information validating business use of your vehicle is readily available and you can easily file for your tax deduction.