VEHICLE DEDUCTIONS LOWER TAXES
Benjamin Franklin said “…nothing can be said to be certain, except death and taxes.” It’s obvious ol’ Ben wasn’t a contractor or the owner of a construction company or landscaping business. If he were, his quote would have included a third certainty – our desire to lower taxes.
Money matters to all of us. So if you’re using a pickup for business purposes, then here’s a chance to keep some of those tax dollars by cashing in on what it costs to drive it.
You basically have two choices for deducting expenses related to your pickup: Keep track of your business mileage and deduct at the standard IRS mileage rate (Mileage Method) – or deduct actual expenses (Actual Method).
There is no black and white answer on which method will give you the highest deduction. Generally with a newer vehicle, you will have a larger deduction if you use the Actual Method.
You can deduct all actual business-related expenses such as gas, oil, repairs, tires, insurance, registration fees, licenses and depreciation (or lease payments). It is the depreciation component which makes this method generally higher if you have a new vehicle.
If you use your pickup for both business and pleasure, only the business portion is allowable for a tax deduction. You will need to keep track of business miles to first determine the business percentage usage. This percentage is then used to calculate the business portion of the actual expenses that can be deducted.
Something to note – if you only own one vehicle and claim that it is used 100 percent for business purposes, the IRS will probably be asking you some questions about it, so keep that in mind.
If you’re not really a paperwork kind of business owner – and you’re known for losing receipts – the Actual Method may not be the method for you. This method requires detailed record keeping and an understanding of depreciation calculations – or the hiring of an accountant to assist you.
A lot of guys don’t want to mess with keeping track of all their receipts and prefer a simpler approach.
The less complicated way to calculate your deduction is the Mileage Method. There is still some record keeping involved, but really all you need to know is the number of miles driven for business and the latest IRS mileage rate to calculate your deduction.
You can also deduct business-related parking fees and tolls when using the Mileage Method, but you still can’t deduct your parking and speeding tickets! Just make sure you keep receipts so you have adequate support for these expenses if you happen to get a visit from the IRS.
The IRS has specific requirements for record keeping for business mileage. You are required to keep records for at least 90 consecutive days.
The purpose of the mileage log, from the IRS’ view, is to determine what percentage of your driving is used for business and personal purposes. A 90-day mileage record is generally acceptable as a valid representation of a person’s driving habits.
However, a 90-day log may not provide an accurate picture of your annual business use, and if that is the case, then you may want to keep a mileage log for the year. A notepad or vehicle mileage log book that you keep in your vehicle work best.
The rules require that you keep track of the date, business name, destination, and beginning and ending odometer readings for each business trip.
However, the IRS says that you do not have to record the actual business purpose for every trip. For example, if you’re going to lunch to meet a prospective client, simply recording this as a business meeting is sufficient. This is good to know since it makes it a little easier to keep track of your mileage.
There are also some high-tech ways available to track your business miles. For example, if you have a smart phone, there are some apps available which will generate a mileage log. For contractors who never go anywhere without their phone, this can be a great method of tracking business mileage.
Some GPS units also have software available that can interface with your computer and generate a mileage log. If you are a techie guy, go online and check out what is available for your specific phone or GPS unit.
The IRS recently announced that the 2011 standard mileage rate is $ .51 per mile (up from $ .50 per mile in 2010). The standard mileage rate for business is based on an annual study of the fixed and variable costs of operating an automobile, according to the IRS.
The business standard mileage rate cannot be used for more than four vehicles used simultaneously, so if you have a fleet of pickups for your business, go to www.IRS.gov to check out specific rules for fleets.
Once you have chosen a method, you will need to follow the IRS rules on switching from one method to another in future years. You have the option of switching from the Mileage Method to the Actual Method, but generally you cannot switch from the Actual Method to the Mileage Method. So choose wisely from the start!
Another consideration is IRS rules do not allow for using one method for the first half of the year and another method for the second half of the year.
But you have up until the point that you file your tax returns to select a method for the entire year, as long as you have receipts and records to support the method you have selected.
The surest way to determine which method saves your business the most tax dollars is to keep vehicle receipts and track business miles the first year. Then calculate your tax deduction both ways and see which is highest.
Whichever method you choose will save you money on year-end taxes. The important thing is to choose a method and set up a record keeping system to keep the IRS happy.
For more information on these methods, check out IRS Publication 463 or discuss with your accountant to make sure you have all the details covered. Have a question for Money Matters? Moneymatters@smith-walton.com.