Car tax deduction - how to turn car expenses into tax deductible fortune
Before I proceed, here is the disclosure - tax regulations are very fluid and whatever in this post is perfectly valid today, may not be valid tomorrow. I am not an accountant. Always seek professional accounting help, preferably from some one with CPA, which stands for Certified Public Accountant, credentials.
A vehicle is a big ticket item and is very frequently abused by the business owners for tax reduction purposes. You have to be careful because car tax deduction is the business expense which gets audited by the IRS the most, so you must not go overboard. Everything ought to be properly documented.
Use more than one car for business
Doesn't matter how many vehicles you use for business. The business usage is based on business miles you drive. To calculate business usage, divide business miles by the total miles driven during a year. Do it for every car used for business. So if you drive the car for 12,000 during the year but only 6,000 miles for business, you may deduct half of any car related expenses or half mileage at the IRS standard mileages rate, which for 2010 is 50 cents per mile for business miles driven. You can also deduct 16.5 cents per mile driven for medical or moving purposes and 14 cents per mile driven in service of charitable organizations.
If your household has two vehicles, use each car to maximize your tax deduction. Buying another car just for tax purposes is not recommended, although many use it as a nice excuse to drive a fancy auto they always dreamed of. You can easily justify tax deduction for both cars. You can drive one car fall / winter, the other spring / summer. You can also have higher end vehicle when dealing with rich clients and middle of the road sedan that looks more reasonable. You must document business mileage daily when using more than one car for business.
Car tax deduction - the Actual Expense or the Optional IRS Standard Rate
A self-employed tax payer can deduct either, the Actual Expense or the Optional IRS Standard Rate, and of course you should choose whatever is larger. Actual expenses include part of your gas, wash, maintenance, repairs, depreciation, insurance, tolls, parking, interest and other car related expenses. If you decide to use the IRS standard rate, you still can deduct business share of interest, taxes and tolls.
Depreciating your car
There are two depreciation methods commonly used for car tax deduction purposes. First is the straight line, the slower method where you can deduct equal amounts. Second is accelerated which permits faster deductions upfront. Regardless of the method you choose, tax law requires you to treat your vehicle as purchased in the middle of the year of purchase. So when you buy the car in February or September, the IRS consider it purchased July 1st. Thus you don't get an entire year depreciation in the first year.
If you think you can buy the current year car in December and get much better deal from a dealer in addition to a half year depreciation, the IRS did not miss this one - when you buy 40% of all depreciable equipment for the current tax year in the last 3 months of the year, you have to treat the purchase as if you made it in the middle of the last quarter of the year which is November 15 - this cuts first year depreciation.
The second part on Car Tax Deduction will be coming shortly.
Sun Mar 20, 2011 11:03AM | Copyright: www.bad-credit-advisor.com | More in Taxes | Comments (0)
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