How To Write Off Your Business Car Expenses

Tuesday Tips is a series of articles from local experts to help you save money, make better decisions and plan for a better future.

Well, amidst all that hot air that has come out of Washington, here’s another little piece of tax news that you may not have heard.

The mileage rates for 2011:

  • 51 cents per mile for business miles driven
  • 19 cents per mile driven for medical or moving purposes
  • 14 cents per mile driven in service of charitable organizations

Let’s focus on the first rate of 51 cents per mile for business miles – it’s a slight increase from the 2010 rate, which is 50 cents per mile. This is good news for small business owners and self-employed folks who are looking for an easy way to increase your business deductions.

You need look no further than your driveway – assuming you drive the same number of miles for business in 2011 as you did in 2010, your vehicle deduction will increase by 2 percent (Okay, so it’s not as much as you were hoping for, but, hey, every little bit helps).

So this is a good time to review the rules for deducting car expenses in your business or self-employment activity.  Here we go…

First, the general rule: your vehicle is deductible to the extent you use it for business. So, if you drive your car 100 percent for business, all car-related expenses are deductible.

But if you use it less than 100 percent for business, do not despair. Less-than-100 percent use is very typical among small business owners and the self-employed – you’ll still come out way ahead by keeping good vehicle expense records.

For example, if you drive your car 75 percent for business, then you get to deduct 75 percent of your vehicle expenses.

Now to the fun part. There are two methods for reporting your car expenses:

  1. Actual Expense Method
  2. Mileage Method

With the Actual Expense Method, you have to keep track of all your vehicle related expenses, such as: gasoline, oil, maintenance and repairs, insurance, license and registration, wash and wax, supplies and equipment, depreciation expense (including Section 179 deduction), lease payments, loan interest, state and local taxes. You add up all those deductions and multiply the total by your business use percentage, which is determined by dividing business miles by total miles driven.

The Mileage Method works like this: instead of tracking all the actual expenses listed above, you only need the number of business miles driven, which is multiplied by the standard mileage rate published each year by the IRS.

For 2010 the mileage rate is 50 cents per mile. If you drive your car 10,000 miles for business in 2010, your deduction is $5,000, regardless of what your actual expenses might have been.

NOTE: There are two actual expenses that are also deductible under the Mileage Method – interest and taxes.

Now for the obvious question: Which method is better?

Well, here’s how I look at it. If you want to get the highest deduction, you should “run the numbers” under both methods and then use whichever method results in the higher deduction. You are allowed to pick whichever method you want.

But once you pick a method, be careful to follow the rules on “switching” from one method to the other: You can switch from the Mileage Method to the Actual Method, but generally are not allowed to switch from the Actual Method to the Mileage Method.

Having said that, let’s be practical. If you hate record keeping, use the Mileage Method. It’s much simpler. You won’t have to keep all those receipts.

Even the Mileage Method requires some record keeping, however. You should keep a log that documents the business use of the vehicle. Here are three IRS-approved car logs:

  1. Daily Log. Yep, you just record all business miles for all 365 days of the year.
  2. 90-Day Log. Here’s a little-known rule – instead of keeping mileage records for the entire year, you can get by with just a representative portion of the year – and a 90-day period is considered an adequate representation of the entire year (assuming that you drive about the same number of miles all year long). So you would keep a Daily Log for a 3-month period, say January through March. To get your annual mileage total, you multiply the three-month total by four.
  3. One-week Log. Here’s another short-cut: The IRS also allows you to keep a log for just the first week of each month. Then you multiply that week’s mileage by four to get the monthly total. (Again, assuming that you drive about the same number of miles throughout the month.)

Regardless of which method you use, there’s a goldmine of deductions sitting right there in the garage.

Joseph Reisman, of Joseph S. Reisman & Associates, has been serving tax prep and business accounting expertise from his Coney Island Avenue office for more than 25 years. Check out the firm’s website.