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How To Drive The Irs Crazy
By: Wayne M. Davies
Looking for an easy way to increase your business deductions? Look no further
than your driveway.
First, the general rule: your vehicle is deductible to the extent you use it for
business.
So, if you drive your car 100% for business, all car-related expenses are
deductible.
But if you use it less than 100% for business, do not despair. Less-than-100%
use is very typical among small business owners and the self-employed -- you'll
still come out way ahead by keeping good vehicle expense records.
For example, if you drive your car 75% for business, then you get to deduct 75%
of your vehicle expenses.
Now to the fun part.
There are two methods for reporting your car expenses:
1. Actual Expense Method
2. Mileage Method
With the Actual Expense Method, you have to keep track of all your vehicle
related expenses, such as:
-- gasoline
-- oil
-- maintenance & repairs
-- insurance
-- license & registration
-- wash & wax
-- supplies & equipment
-- depreciation expense (including Section 179 deduction)
-- lease payments
-- loan interest
-- state and local taxes
So you add up all those deductions and multiply the total by your business use
percentage, which is determined by dividing business miles by total miles
driven.
The Mileage Method works like this: instead of tracking all the actual expenses
listed above, you
only need the number of business miles driven, which is multiplied by the
standard mileage rate published each year by the IRS.
For 2003 the mileage rate was 36 cents per mile.
For 2004 the mileage rate was 37.5 cents per mile.
For 2005 there are two mileage rates: 40.5 cents/mile
from January 1 through August 31, and 48.5 cents/mile
from September 1 through December 31.
For 2006 the mileage rate is 44.5 cents per mile.
If you drove your car 10,000 miles in 2005, your deduction is at least $4,000
(depending on how many miles you drove during the last four months) --
regardless of what your actual expenses might have been.
NOTE: There are 2 actual expenses that are also deductible under the Mileage
Method -- interest and taxes.
Now for the obvious question: Which method is better?
Well, here's how I look at it. If you want to get the highest deduction, you
should "run the numbers" under both methods and then use whichever method
results in the higher deduction.
You are allowed to pick whichever method you want.
But once you pick a method, be careful to follow the rules on "switching" from
one method to the other: You can switch from the Mileage Method to the Actual
Method, but generally are not allowed to switch from the Actual Method to the
Mileage Method.
Having said that, let's be practical. If you hate recordkeeping, use the Mileage
Method. It's much simpler and faster. You won't have to keep all those receipts.
Even the Mileage Method requires some recordkeeping, however. You should keep a
log that documents the business use of the vehicle. Here are 3 IRS-approved car
logs:
1. Daily Log. Yep, you just record all business miles for all 365 days of the
year.
2. 90-Day Log. Here's a little-known rule -- instead of keeping mileage records
for the entire year, you can get by with just a representative portion of the
year -- and a 90-day period is considered an adequate representation of the
entire year.
So you would keep a Daily Log for a 3-month period, say January through March.
To get your annual mileage total, you multiply the 3-month total by 4.
3. One-week Log. Here's another short-cut: The IRS also allows you to keep a log
for just the first week of each month. Then you multiply that week's mileage by
4 to get the monthly total.
Regardless of which method you use, there's a goldmine of deductions sitting
right there in the garage.
About the Author:
Wayne M. Davies is author of 3 tax-slashing eBooks for small business owners and
the self-employed. For a free copy of Wayne's 25-page report, "How To Instantly
Double Your Deductions" visit http://www.YouSaveOnTaxes.com
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