How To Drive The Irs Crazy
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How to Maximize Your Tax Deductions: Vehicle Expenses
Summary:
Boost your business deductions using your vehicle?"an often-overlooked asset.The fundamental rule is simple: your vehicle expenses are deductible based on the percentage of business use.
Understanding Vehicle Deductions
If your car is used exclusively for business, you can deduct all related expenses. But don't worry if it's not used 100% for business?"many small business owners and self-employed individuals find themselves in this situation. You can still benefit significantly by maintaining accurate records of your vehicle expenses.
For instance, if 75% of your driving is for business, you can deduct 75% of your vehicle expenses.
Methods for Calculating Deductions
There are two primary methods for reporting vehicle expenses:
1. Actual Expense Method
2. Mileage Method
Actual Expense Method:
You'll need to keep track of all car-related expenses, including:
- Gasoline
- Oil
- Maintenance and repairs
- Insurance
- License and registration
- Wash and wax
- Supplies and equipment
- Depreciation (including Section 179 deduction)
- Lease payments
- Loan interest
- State and local taxes
Total these expenses and multiply by the percentage of business use (business miles/total miles).
Mileage Method:
Instead of tracking each expense, simply record the number of business miles driven and multiply it by the IRS standard mileage rate. Here are some historical rates:
- 2003: 36 cents per mile
- 2004: 37.5 cents per mile
- 2005 (January-August): 40.5 cents per mile; (September-December): 48.5 cents per mile
- 2006: 44.5 cents per mile
For example, if you drove 10,000 business miles in 2005, you can deduct at least $4,000, regardless of actual expenses.
Note: Interest and taxes are also deductible under the Mileage Method.
Choosing the Best Method
To maximize deductions, calculate both methods and select the one offering a larger deduction. Once chosen, you can switch from the Mileage Method to the Actual Method, but not vice versa.
If you prefer simplicity, the Mileage Method requires less recordkeeping since you only need a mileage log.
IRS-Approved Mileage Logs
Even with the Mileage Method, documentation is essential. Consider these approved logs:
1. Daily Log: Record all business miles each day.
2. 90-Day Log: Track daily mileage for three months to represent annual activity. Multiply by 4 for an annual estimate.
3. One-Week Log: Record the first week of each month, then multiply by 4 to get monthly totals.
Utilize your vehicle as a valuable tool for deductions and uncover potential savings right in your driveway.
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