As a business professional you may travel a lot for work. Maximize tax benefits when you use your car for business so you don’t leave money on the highway with unclaimed tax deductions. It’s not as complicated as you might think.
You can calculate your auto expense deduction on your business tax return using the standard mileage deduction or the actual-expense deduction. Both methods can maximize tax benefits but have pros and cons but the difference in returns can be substantial. Having a general understanding of how each one works and the special tax deductions and credits available will make tax time a little less painful.
Standard Mileage Deduction
For every mile driven in 2016 for business purposes the standard mileage rule allows an income deduction of 54 cents per mile.
What is considered a business purpose:
- Driving to meet a client
- Attending a continuing education meeting or association meeting, and other business-related events.
- Taking a client out for a drink from the job site after the unveiling of a project or from the courthouse after a win.
- Driving to a temporary work location or installation.
Driving from home to your office, office to home, or home to another regular place of business is nondeductible. You can navigate this exception by setting up a home office as your principal place of business when developing a plan to maximize tax benefits for automobile usage.
The standard mileage rule is generally best for professionals who primarily work from home and drive to meet clients, go to other locations for business purposes. You can have an office inside your home as well as outside your home, but as long as you do the majority of your work out of your home office, you can claim the mileage to and from your home office.
If your tax return is selected for an audit, you will be requested to provide a log of business miles driven to the IRS or the IRS will disallow the deduction. If you have not been a good note taker but you use Microsoft Outlook or Google Calendar and Google Maps, you should be able to recreate an accurate log fairly easily. Include the starting point and end point of the trip, the date and time of the trip, as well as the business purpose.
Lease your car? No worries, it is permissible to use the standard mileage rule for leased cars.
Deducting Actual Expenses
Deducting actual-expenses allows you to deduct the actual costs of operating the vehicle for the year. Such actual expenses include car maintenance, gas, car loan interest, insurance, and registration fees. Loan principal payments are not deductible.
If your car is used for both personal and business purposes, you must prorate the expenses and reflect only the business use. Just as with the standard mileage deduction, commuting to and from your regular place of business, unless it is your primary home office, is not considered a business activity.
A car can be depreciated but in order to limit depreciation of expensive vehicles, the amount is limited. As of 2016, the depreciation limits are: $3,160 for the first tax year the vehicle is in service; $5,100 for the second year; $3,050 for the third year; and $1,875 for each successive year.
The actual expense method is recommended for professionals that do not drive very often and/or incur high maintenance costs. This is an ideal method to use for a used luxury car after it is out of warranty as well as leased cars because most of the lease payments are deductible.
Special Deductions and Credits
Here are some of the most common tax deductions or tax credits to maximize tax benefits when purchasing a new vehicle.
Alternative fuel tax credits. Lease cars that use alternative energy such as hybrids, natural gas or electric cars, may be eligible for a tax credit. The amount of the credit depends on the type of vehicle and if it is subject to a phase-out.
A tax credit is different from an income deduction in that a tax credit reduces the tax bill dollar for dollar. However, if you are eligible for a tax credit in a certain dollar value but you have a smaller tax bill, you will not get a refund check for the excess.
Bonus depreciation deduction. According to Revenue Procedure 2016-23, any car purchased and placed in service in 2016 is eligible for a bonus depreciation of 50% of the cost with an $8,000 limit.
Section 179 deduction. Light trucks and sport utility vehicles that weigh over 6,000 pounds are generally eligible for a very large up-front deduction. Check to see if vehicle qualifies for the deduction. If you claim this deduction, you cannot use the standard mileage method for computing auto expenses to maximize tax benefits.
Whichever method you select, make sure you take full advantage of the credits and deductions available to you.