A column on personal finance prepared by the Virginia Society of Certified Public Accountants
DEDUCTING BUSINESS CAR EXPENSES
(March 1, 2004) – Operating a car for business can be expensive so it’s important to take advantage of the available tax breaks. Here’s what the Virginia Society of CPAs says about deducting costs related to the business use of your car.
Defining Business Miles
The IRS defines business use as the miles you drive your car between two business locations. If, for example, you travel between your office and the office of a customer or between two jobs, your travel is considered a deductible business expense. If you have a regular place of business, the cost of traveling between your home and a temporary work site is deductible, regardless of the distance traveled. Commuting from your home to your regular place of business is not deductible. However, for self-employed workers who work from a home office, the cost of driving from home to other work locations is a deductible business expense.
Computing Qualified Expenses
There are two methods you can use to compute deductible expenses: the standard mileage rate or the actual cost method.
Stantard Mileage Rate Method:
With the standard mileage rate, you claim a flat amount for each business mile you drive. This rate is set by the IRS and adjusted annually. The standard mileage rate for 2004 is 37.5 cents a mile, up from 36 cents in 2003. To use this method, multiply the number of business miles driven during the year by the standard mileage rate.
Actual Expense Method:
To use the actual expenses method, calculate all vehicle expenses, including gasoline and oil, tires, battery, repairs, driver’s license and car registration fees, car insurance, and depreciation. To arrive at the deductible amount, multiply your total actual costs by the percentage of business use for the vehicle based on business miles as a percentage of total miles.
Should you use the actual expense method, the style and weight of the vehicle you purchase can affect how much you can write off each year in depreciation. It’s a good idea to check with your CPA before making this important decision. Note that business-related tolls and parking fees are deductible in full regardless of which method you use.
New for 2004
Previously, taxpayers using more than one vehicle at a time for business could not use the standard mileage rate. The IRS has announced that, beginning in 2004, taxpayers who use no more than four vehicles for business purposes during the tax year may now use the standard mileage rate.
Which is the Best Method for You?
It’s important to carefully consider whether to deduct the standard mileage rate or your actual costs. The method you choose for deducting business auto expenses for the year you place the car in service affects your options in later years.
Should you choose to use the standard mileage method in the first year, you can switch to the actual cost method in later years. However, the reverse does not apply. When you use the actual cost method in the first year, you cannot switch to the standard mileage for that car in any subsequent year.
Regardless of the method you use, certain record keeping requirements apply. The best way to keep track of the necessary information is to keep a log handy to record the date, your business miles, the destination, and the business purpose of your trip.
While the standard mileage rate is generally easier to use and doesn’t require as many detailed records, the actual cost method may result in a larger deduction, particularly with a relatively expensive car. A CPA can help you determine if actual expenses or mileage yield the best savings.
The Virginia Society of CPAs is the leading professional association dedicated to enhancing the success of all CPAs and their profession by communicating information and vision, promoting professionalism, and advocating members’ interests. Founded in 1909, the Society has nearly 8,000 members who work in public accounting, industry, government and education. This Money Management column and other financial news articles can be found in the Press Room on the VSCPA Web site at www.vscpa.com.
Lifetime Financial Planning, Inc.
Dean Knepper, CPA, CERTIFIED FINANCIAL PLANNER™ professional
2325 Dulles Corner Boulevard, Suite 500, Herndon, Virginia, 20171
208 South King Street, Suite 201, Leesburg, Virginia, firstname.lastname@example.org
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