There are a lot of misunderstandings about deducting your car or truck expenses for business, so it’s important to understand how you do this properly without taking too much or too little as a deduction on your tax return. To this set of frequently asked questions, here are six guidelines on taking mileage and depreciation that you won’t want to miss.
- Can I buy a new vehicle for my business and save money on my taxes? Sure, if you have a valid business reason for needing a vehicle for your business. If you will be using the vehicle more than half the time for business purposes, such as going to see customers, picking up supplies for the business, traveling to locations to perform work, etc. those are valid business purposes. (Note: Fifty percent usage for business is required for taking the 179 deduction, which allows you to write the car off faster.) Commuting from your home to your work location is not a valid business purpose. Another test would be whether or not you would pay for a new vehicle if you had an employee doing the same work you are doing. Would you also think it necessary to buy your employee a new vehicle to perform their job duties? Still another question to ask is whether or not other similar businesses have company vehicles. If your business is different from others, then you may want to reconsider buying a vehicle for the business.
- If I have a wrap or a magnetic sign on the side of my vehicle advertising my business, that’s a valid business purpose, right? Wrong! The IRS relies on what you are using the vehicle for in your business, not how the vehicle looks, when determining business usage.
- Which is better, taking actual car expenses or taking the standard mileage deduction? This depends on the situation. If you have a valid business need for a car to be purchased by the business, and you are expecting a large, unusual profit in your business this year and are looking for a way to offset the gain, buying a new vehicle will allow you to take a large writeoff in one year which could really help your tax situation in that year. In 2013, the maximum deduction for a car is $11,160 and for a truck or van is $11,360. If you are not in need of a big deduction due to an unusually high profit, or you like to change vehicles over frequently, say every two years, you may not want to take advantage of special depreciation allowances because of depreciation recapture, which results in recognizing ordinary income on your sale or trade-in. The standard mileage deduction may be the best bet for most businesses who use vehicles for both business and personal reasons. Standard mileage is designed to reimburse the total cost of driving your vehicle, including gas, maintenance and depreciation. However, you can continue to take standard mileage even if your vehicle is past its useful life of 5 years. The disadvantage is that the standard mileage rate is not always enough to pay for your actual business usage if you have major repairs or gas prices jump up quickly.
- Do I really have to keep records of business use of my vehicle? Yes, you need to keep a mileage log showing odometer readings, where you went, business purpose for the trip, and personal and commuting mileage as well. It really is easier to do this as you go and provides a more credible record should you ever be audited. This mileage log is essential for claiming standard business mileage, but is also important for vehicles purchased by your business, particularly if they are not used 100 percent for business.
- I’m not an employee, I’m a contractor, so I can deduct all my mileage to work, right? Maybe. It depends on whether or not you have a home office that you use for doing some work, for clients, meeting clients at your home office, and/or taking care of the details of your business such as billing your clients. It also depends on how many clients you work with or at their establishment. The more your job as a contractor looks like an employee’s commute, i.e. you go to the same place every day and do most of your work there, the less likely these miles will be considered commuting miles. However, if you do not have a routine where you see your clients on a regular basis, you have other clients you see at random intervals, and you do some work at home, your miles look less like commuting miles which are not deductible. It’s good to go through this with your professional tax preparer or review IRS Publication 463, Travel, Entertainment, Gift and Car Expenses.
- I can deduct my mileage for attending to my vacation rental property, correct? Yes, in most cases. The concern would be what is the primary purpose of your trip, to attend to the property or to take a vacation? This is determined based on the amount of time spent attending to the rental property versus doing other things not related to the rental property. For example, if you spent two solid days cleaning and painting your property to get it ready for a new rental, and you went back home after 3 days, clearly that is mileage you can claim as a deduction against your rental income. If on the other hand you spent 20 minutes stopping in to talk with the property manager where your rental was located and the rest of your weekend camping and hiking, you probably can’t claim that mileage as a business expense. There are a lot of gray areas in between these two examples, so you may want to consult with your tax preparation professional on how to handle your situation.
The theme here is what would a reasonable person do and what really makes sense from a business standpoint? Consider this before you assume you can deduct a vehicle or your mileage for business and ask a professional tax preparer what they think if you have more questions.