With sky-high gas prices, it is a struggle to find the bright side of high prices. You might be saying, “is there really any bright side to high gas prices?”
Well, there is one bright side… and that is a higher tax deduction for your vehicle. If you deduct actual expenses for your vehicle, you naturally will have higher gas costs, which in turn means a higher deduction. However, changes in gas prices are also sometimes reflected in adjustments to the standard mileage deduction rate published by the IRS. If your standard mileage deduction rate is higher than your actual costs then you have helped further reduce your tax liability. Now, that’s a bright side!!!
During the preparation of your tax return, you may be wondering about the various business expenses that you may be eligible to deduct. As we just discussed, one of the most common ways to reduce your tax liability it to deduct the business use of your vehicle.
However, all too often, taxpayers incorrectly include the cost of commuting in the expense deduction. The cost of commuting from home to your job or business location is a nondeductible personal expense known as commuting expenses. This holds true whether you are commuting to a job or your own business or whether you do work during the commute.
Determine if your Business Vehicle Expenses are Deductible
Determine if your vehicle expenses are deductible. The following are common situations where expenses would be deductible:
· Travel to and from temporary work locations or from one work location to another work location in the course of a day such as transportation between your first job and second job
· Visiting clients or customers or meetings away from your regular work location
· Travel outside your metropolitan area for business
Track your Business Vehicle Expenses
Keep track of all your business related mileage and transportation expenses. You can do this by keeping a mileage log. Be sure to notate the date, mileage, the purpose of the travel and expense. If possible, retain all expenses.
Reporting Your Car Expenses
There are two methods for reporting your car expenses:
1. Actual Expense Method
2. Mileage Method
With the Actual Expense Method, you have to keep track of all your vehicle related expenses, such as:
· Maintenance & Repairs
· License & Registration
· Depreciation Expense (including Section 179 deduction)
You add up all those deductions and multiply the total by your business use percentage, which is determined by dividing business miles by total miles driven.
With the Mileage Method you only need the number of business miles driven, which is multiplied by the standard mileage rate published each year by the IRS.
If you want to get the highest deduction, you should calculate your deduction under both methods and then use whichever method results in the higher deduction.
You are allowed to pick whichever method you want. However, if the Actual Expense Method is chosen in the first year, it must be used in all subsequent years until the vehicle is no longer used for business.
Every effort has been taken to provide the most accurate and honest analysis of the tax information provided in this blog. Please use your discretion before making any decisions based on the information provided. This blog is not intended to be a substitute for seeking professional tax advice based on your individual needs.