During the tax season you may find yourself wondering how you can reduce your tax liability. One way to reduce your federal tax liability is to deduct the business use of your vehicle.
Keep track of all of your business-related mileage and transportation expenses. To do this you can keep a journal or spreadsheet that documents when you traveled, how far you went in miles, what the purpose of the travel was and what type of expense you incurred. If you paid a parking fee document the amount and, if possible, collect a receipt.
Determine if your business use of your vehicle is deductible. There are many transportation situations that qualify as a deductible transportation cost. Travel to and from temporary work locations are considered deductible expenses. A temporary work location should be limited to jobs that you don't reasonably expect to last more than one year in length. Transportation from a first job to a second job is also a qualified deductible travel expense. However, if you make a personal stop between your first job and your second job location, you can only deduct the actual mileage between the two job locations. If you don't have a regular place of work and travel as a part of your normal duties, then your travel expenses within your metropolitan area are not deductible. However, if you need to travel outside your metropolitan area for business, then the mileage is deductible. Parking fees associated with visiting clients are also qualified deductions. If you are self-employed and have a home office, then your home can be considered your primary place of business and any travel to another location to work can be qualified as deductible under the travel expense rule that applies to traveling between places of work.
Highlight which events in your travel log are deductible using the qualifications listed above.
Divide the costs by income type. For example if you have a regular employer who doesn't reimburse travel expenses and you have a home business, then you will want to separate your costs depending on who the travel was for. This is because you will need to report mileage for your regular employer in a different section on your tax return then you will for your home business travel expenses.
Divide your travel expenses into two groups: mileage and parking fees.
Total your parking fees and then total your mileage.
Multiply your total deductible mileage by the current year's mileage rate. For example, in 2005 the mileage rate ranged between 40.5 cents per mile and 48.5 cents per mile.
Add together your parking fees and mileage amounts.
Record regular employment transportation costs on Schedule A line 20.
Record self-employment transportation costs on Schedule C under section II for car and truck expenses following the instructions that come with this schedule.
Record other deductible vehicle expenses as follows:
- If you itemize your deduction on your federal tax return you can deduct your state and local personal property taxes for your motor vehicles on Schedule A, line 7 - If you are self-employed then you can deduct the business portion of your state and local personal property tax for your motor vehicles on Schedule C, Schedule C-EZ, or Schedule F depending on your situation - If you sell, trade in or dispose of your vehicle, you may need to report a profit or loss (see IRS publication "Disposition of a Car" for information on how to deal with this issue.)
Determine what percentage of your vehicle's use can be considered personal and what percentage of your vehicle's use can be considered business. For example, if you drive 10,000 miles per year for business and 5,000 miles a year for personal reasons, then you can only deduct 66.7 percent of your actual car expenses (10,000/15,000 = .667).
Learn what expenses are possible to deduct as an actual car expense. There are twelve basic actual car expenses that can possibly be deducted, including depreciation, licenses, gas, oil, tolls, lease payments, insurance, garage rent, parking fees, registration fees, repairs, and tires.
Record the business-related car expenses for licenses, gas, oil, tolls, insurance, garage rent, parking fees, registration fees, repairs and tires in a spreadsheet or journal. Keep all receipts in a folder or envelope to support your deduction claims. If the expense benefits both personal use and business use of the vehicle, then you will need to use the percentage of business use of the vehicle determined above to determine what percentage of these expenses you can deduct.
Determine if you can deduct interest on your car payments. If you are a regular employee of a company that you do not own, then you cannot deduct your car loan interest. If you are self-employed, then you can deduct a percentage of your interest payment. This percentage must reflect the amount of time the vehicle is used for business purposes.
Determine if you can deduct taxes paid on your vehicle. If you are a regular employee of a company then you can deduct the personal property taxes charged by state and local agencies if you itemize your deductions. Enter the full amount of personal property taxes assessed on your vehicle on Schedule A, line 7. If you are self-employed then you can deduct the portion of your vehicles personal property tax on Schedule C, Schedule C-EZ, or Schedule F. Again the percentage of the taxes deducted needs to reflect how much the vehicle is used for business purposes as opposed to personal purposes.
Determine if you can deduct sales taxes assessed on your vehicle. Generally you cannot. However, you can deduct the non-business portion of your sales tax on Schedule A as long as you don't deduct state and local income taxes.
Determine if you can deduct fines for traffic violations. You cannot deduct fines charged for traffic violation, nor can you deduct collateral that you forfeit for traffic violations.
Determine if you can deduct losses or damage caused by accidents and thefts. Yes, you can deduct the portion of your loss that is not covered by insurance. See IRS publication 547 for details about this deduction.
Determine if you can deduct depreciation on your vehicle. You can deduct depreciation on you vehicle or, if you qualify, you may instead treat the business cost of a car as a current expense using a section 179 deduction. For more information on this deduction please refer to IRS publication 463 page 16.
Determine if you can deduct a lease payment. You can either use the standard mileage method or you can deduct a percentage of the lease payment based on how much the vehicle is used for business purposes.
Keep records to support your expense claims. Keep a journal to document your mileage, the purpose of the travel, who it was for, etc. Get a receipt whenever possible.
If you want to minimize your paperwork, don't use the actual car expense method. Make sure you can back up your expense deductions. If you are audited then you will need to have some proof of your claimed expenses.