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Tips for Taking The Auto Expense Deduction In Your Business

It is the dreaded question that you get every year, “How many miles did you drive for

business last year?” When your accountant asks you this question, you tell her

you drove 6,000 miles for business. You get this response, “Hmm, did you track your miles using contemporaneous record keeping or is this just a guesstimate?”

You know that keeping good mileage records adds up to a great tax deduction, but it is a big hassle to track those miles consistently and accurately. The administrative work

adds up quickly when you have to go back through receipts or calendars to

create a mileage log.

What auto expenses can you deduct for business purposes? Can you purchase a new SUV or truck and take a large deduction for your vehicle? That depends! Do you drive the vehicle mostly for business purposes and do you have good records to document your business use.

When you purchase a new vehicle, you have the option of calculating the actual costs of using the vehicle (purchase price, gas, insurance, and maintenance) and deducting the business percentage of those costs or you can use the standard mileage rate. The standard mileage rate is simple and effective for most taxpayers. Each year the IRS sets the standard mileage rate which is meant to capture the average cost to drive your vehicle for one mile. This is adjusted annually or sometimes twice a year to include the fluctuating costs of gas and other operating costs.

The caveat is that once you choose a method (actual cost or standard mileage rate) you must stick with that for the entire time you own the vehicle. Often you get a great tax deduction in the year you purchase a new car by using the actual costs including bonus depreciation, but the downside to deducting the actual costs of the vehicle is that you have to track all of the expenses. One of the largest deductions is the depreciation on your vehicle (which is the way you deduct the purchase price over time). If you sell the vehicle in the future, you will have to “recapture” that deduction and potentially pay tax on that previous deduction.

Let’s talk about mileage tracking – we hate it but we must do it. You want to be resilient and protected in case you get audited. There are many options on the market that will help automate this process for you. I highly recommend that you use a mileage tracker. Here is a good article to help you determine Which Mileage Tracker is Best.

In summary, you should definitely get a tax benefit for driving your vehicle for business. Keep good mileage records and make an educated decision about whether to use the actual costs or the standard mileage rate. Which method will give you the best deduction over the life of the vehicle?

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