Car expenses: Recordkeeping and tax deductions
If you use your car for business, you may deduct related expenses using one of the two methods allowed by the IRS. You can choose between using the standard mileage method and the actual expenses method.
- Standard mileage. With the standard mileage method, you simply multiply your business miles driven during the year by the IRS’s standard rate. You can also deduct related tolls, parking fees, and the business portion of interest expense on your car loan.
- Actual expenses. With the actual expense method, you can deduct the actual cost of operating the car for business. These expenses include gas, tolls, insurance, parking, repairs, maintenance, registration and license fees, loan interest, and depreciation.
Regardless of the method you select, you need records to support the deduction. You’ll need to keep track of your mileage under both methods, but the actual expense method requires more recordkeeping than the standard mileage method.
Before you opt for the simpler method, however, consider the potential impact of each method on your tax bill. The price for using the mileage rate’s simplicity may be lost deductions. If you drive often or long distances for business, or if your car expenses are high, the alternative actual-cost method may be better. If it’s advantageous, you can switch to this method even if you started with the standard mileage rate for the business vehicle you use now.
In making your decision, you should consider how long you’ll keep the car and the estimated total tax savings under each method. The rules governing business car deductions are full of exceptions and limitations. To be certain you use the method that’s right for you- and that maximizes tax savings – give us a call. We can review your situation and your options with you.