July, 2004 Tax Newsletter

Maximize Your Vehicle Deductions

I believe I get more tax questions from clients relating to vehicles than any other matter.   This makes perfect sense when you consider that vehicle deductions are potentially and typically one of the largest business deductions available to taxpayers.  Vehicle expenses are deductible to the extent the vehicle is used for business.  However, to avoid losing all or part of your deductions, you must carefully observe the recordkeeping and other rules.

There are two methods for reporting your car expenses, the actual method and the mileage method.   The actual method requires you to keep track of all your vehicle related expenses, such as gas and oil, maintenance and repairs, insurance, license and registration, car washes, auto club membership, lease payments or depreciation (including the first year expensing and bonus amounts), and interest payments.  The total of these expenses is multiplied by the business use percentage which is determined by dividing business miles by total miles driven.

The mileage method is much simpler in that you don’t keep track of all the actual expenses as above; you only need the number of business miles driven, which is multiplied by the standard mileage rate published each year by the IRS (37½ cents per mile for 2004).  There are two actual expenses that are also deductible under the mileage method - interest and taxes.

Which method is better really depends upon doing the calculation under both methods and use the higher one.   I’ve always had the philosophy that if the IRS allows you 37½ cents per mile you would probably get a larger deduction using the actual method.  There is an important thing to keep in mind.  You must follow the rules on switching from one method to another.  You can switch from the mileage method to the actual method, but you generally cannot switch from the actual method to the mileage method.   Therefore, if the mileage method is to be used, it must be used in the first year the vehicle is placed in service.  Unfortunately, I have many clients who use the mileage method simply because they do not want to be bothered with keeping all the required receipts.  This may cost them money, but to them it’s a “no hassle” win proposition.

The mileage method does require some recordkeeping.  You must keep a contemporaneous log that documents the business use of the vehicle.   It can be a daily log, a 90-day log, or a one-week log.  A 90-dy log works very well for a traveling salesperson who typically calls on the same customers throughout the year.  The IRS considers a 90-day period to be adequate representation of the entire year.   The mileage for 90 days is then multiplied by four to get the yearly miles.  The one-week log allows you to log the miles for just the first week of each month and multiply that mileage by four to get the monthly total.