Now that it’s almost the end of the year, it’s time to start planning what deductions to take. You want to get the most bang for your buck, reducing your tax liability as much as you can legally. One of the ways that you can reduce what you owe is to deduct some of your expenses for your vehicles.
As you consider your options, think about works best for you. There are two main types of deductions — and its an either-or proposition. Before you decide to go with mileage or actual, stop and think about the kinds of vehicles you have, and how they are used. Here are some things to think about as you figure out how to deduction your auto deduction:
Most business owners, especially if they have cars, focus on this tax deduction. Basically, you just get a deduction for the miles traveled in your car. The IRS offers a mileage deduction that is subject to change (it recently went up to 55.5 cents per mile) each year. It’s pretty simple: Add up the miles you traveled, multiply that number by the per-mile rate, and you end up with your deduction.
Realize, though, that not all deductions are created equal. You can deduct business travel mileage for business purposes, medical purposes and charitable causes. However, if you are driving for personal use, or commuting, you can’t deduct that mileage. Make sure you keep good records of your mileage so that you have it to show if the IRS comes looking.
In some cases, it’s easier to deduct the costs of buying or leasing or car, and deduct the cost of depreciation. Realize, though, that there are depreciation limits. Because of those limits, many business owners find that the actual method doesn’t work too well with cars. With larger vehicles, though, it can make a little more sense. Trucks and SUVs have big costs associated with fuel and maintenance, and the actual method might not be a bad thing. Also, you can deduct your lease payments on cars and trucks, depending on the business usage. (Just make sure you don’t exceed the mileage limit in your lease, or it could cost you.)
Before you rush out and get a gas-guzzler in the interest of a bigger tax deduction, though, make sure that you are aware of the costs involved. If a big vehicle doesn’t make sense for your business, don’t get one. If your business requires a truck or a SUV, go for it. But, first and foremost, do what makes the most sense for your business. A tax deduction is not a dollar-for-dollar reduction in your tax liability, so it may not be as valuable as you think.
You can reduce your tax liability with the help of the auto deduction for your business. However, you also want to make sure that everything is above board. Check with a knowledgeable tax professional to ensure that you are claiming your tax deductions properly. You can also talk with your accountant and have him or her help you figure out whether mileage or actual is the best method for figuring your deduction.
Miranda is freelance journalist. She specializes in topics related to money, especially personal finance, small business, and investing. You can read more of my writing at Planting Money Seeds.