Maximizing Automobile Deductions

There are many ways to get maximum deductions from business use of your automobiles. The fact that most families have more than one vehicle increases some of the benefits of this deduction. Below are several ideas to increase your automobile deduction:

Method # 1: Take the greater of standard IRS mileage or actual expenses

You cannot take BOTH. However, tracking both types of costs ensures that your tax preparer can determine which will get you the best deduction for that year.

To do this, you must keep all actual receipts for gas & oil, maintenance and repairs, insurance, titles, registrations and license as well as inspection costs.

Further, you must keep an accurate log of the actual business mileage driven for the year compared to the total mileage for the year in order to properly account for the business use percentage.

Recently the IRS has started demanding repair receipts to prove mileage records, so keep those especially even if you’re going to use the mileage deduction

Method # 2: Keep complete and accurate mileage records

This is critical for any vehicle that is used less than 100% for business & for all vehicles using the mileage deduction.

The best way to do this is to keep a mileage log in the car in a place you CANNOT forget to use it.

One man velcros his to his steering wheel when he gets out of the car so he has to log the odometer reading before he can drive. Then he velcros it to the door so he can’t get out without logging the ending odometer reading.

Another is to have a list of standard mileages that are driven regularly. Keep a daily list of trips to and from those places and then track odometer readings for unusual or infrequent trips. Make sure that each trip is logged with the date, mileage and business reason for the trip (e.g. ‘meeting with so and so’, or ‘purchase business supplies’).

The key is to ensure that you can prove, beyond any doubt, that the mileage is accurate and business-related. There is not such thing as too much documentation for a mileage deduction. However, at the very least, use the following as a guideline.

Method # 3: Use the fastest depreciation method to get maximum deductions

Most tax preparers automatically use maximum depreciation on business tax returns, but this is not always the case. Make sure your tax preparer knows that you want the maximum deductions. Generally, this will be MACRS which stands for Modified Accelerated Cost Recovery System which is a system of depreciation created by the IRS.

Under MACRS, a business may take 20% of the cost in the first year, 32% in the second, 19.2% in the third year, and so on. There are limits on the deductions per year, but they are nearly always more than the 20% annual deduction (10% in year 1) allowed by Straight-Line.

For example:
A $20,000 automobile that is used 75% for business would have yielded the following for 1996:

IS LOGO  $3,000 under MACRS ($20,000 x 20% x 75%)
IS LOGO  $1,500 under Straight-Line ($20,000 x 10% x 75%)
IS LOGO  Your deduction would be limited to $2,295 which is the Luxury Limit (3,060 x 75%) for the year applied to the MACRS calculation.

Method # 4: When using standard mileage deduction, use the most efficient car for the deduction.

This one is fairly straight-forward. If one car costs you $0.23 per mile to operate (including depreciation), and the other costs you $0.32 per mile, use the least expensive vehicle for business since you will get $0.315 per business mile as a deduction.

If using two cars for business, consider the average cost of running two versus just one to make the comparison.

Method # 5: When using actual operating costs use both your cars for the deduction

By using two cars, you actually get a percentage of each rather than just one. This only works if you are converting a second already-owned personal vehicle to business use.