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Tax Talk: Deducting Auto Expenses for Your Business

March 12th, 2009

Settle Your Tax DebtThis article by Shery Russ discusses how to deduct auto expenses if you are using your vehicle for business purposes. It emphasizes the importance of keeping and organizing records of car expenses as they relate to business.

If you haven’t done so yet, you may want to start deducting auto expenses for your business from your income tax return. All expenses applicable to the use of your car during business trips, deliveries, and other business-related activities are tax deductible according to the Internal Revenue Service (IRS). Before filing your return, however, try to familiarize yourself with the tax laws governing those deductions.

The Standard Mileage Rate (SMR)

The SMR is a value pre-computed by the IRS that approximates the costs of gas, repairs and maintenance, insurance, and other expenses related to operating a vehicle for business purposes. This system spares taxpayers from the need to compile all receipts supporting their auto expenses.

To compute your deductible auto expenses using the SMR method, you take the sum of your mileage for the year and multiply it by the SMR for the same tax year. Be sure to use the correct SMR because IRS sets a new SMR yearly. Sometimes it is adjusted more than once a year to be more reflective of the prevailing costs.

Using the SMR is optional. You can still use the actual expenses method if you want and that means you will need to keep all your receipts pertaining to your car expenses. Then, you will need to calculate how much you use your car for business vis-à-vis your personal use in percentage terms because that is how you will apportion the aggregate costs of using your car. For example, if you use your vehicle for business 60% of the time, compute for your allowable deduction for auto expenses for business by multiplying your total actual car expenses by 60%.

It is advisable for you to compute your deductible auto expenses using both methods to see which can yield a bigger deduction. Also, do remember to keep your toll fees and parking tickets during your business trips as they are not factored into the SMR. Regardless of the method you used, you will need those receipts so you can claim a deduction for them.

Keep a Complete Record

It is important that you keep and organize your records. You are required to submit records and documents that will corroborate the items you claim in your tax return. Among the records required is a daily log that contains the travel dates of your business trip, purpose of the travel, destination, and miles traveled. You will need this log to compute for the total mileage to be used with SMR. With actual costs, the log will help establish the percentage of your business use.

Some Minor but Important Details

The IRS is very clear in its publications that traveling between work and home does not fall under business use; it is a commuting expense and is not eligible for deduction. Of course, it is a different case with home-based businesses; car expenses related to traveling to meet with customers or suppliers or to make deliveries can be deducted. Short personal side trips during a legitimate business may be considered negligible and the whole trip can be treated as a full business-related activity. Lastly, for your auto expenses to qualify as deductible in your tax return, you should be leasing the car or you own it personally. The car should not be hired out as in a taxi or limousine service.

One Response to “Tax Talk: Deducting Auto Expenses for Your Business”

  1. comment number 1 by: Calley

    I use this new device called the Mileage Logger by Vulocity. You really should check it out. My accountant let me in on it a couple of weeks ago. It’s a got to have if you deduct mileage.


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