Optimize Your Vehicle Deduction if You Own a Business & Get Money Back from Uncle Sam
The vehicle deduction is one of the many tax deductions available to business owners, whether you own a business full time or just on the side.
If you have claimed the vehicle deduction before, chances are you have claimed it in terms of mileage driven for business purposes. Most business owners opt for this route.
Before taking the vehicle deduction on your tax returns next time, consider the actual vehicle expenses you incurred and compare it to the mileage deduction.
Uncle Sam allows us to opt for the deduction in two ways, by either claiming the miles we drove for business, or the actual vehicle expenses we incurred that can be attributed to the business.
If you drive a 4 cylinder Honda Civic, you are likely better off going the mileage deduction route. But what if you drive a 6 cylinder truck or a luxury SUV? Does it cost the same amount to run a larger, more expensive vehicle than a small four cylinder four wheeler?
As far as the Internal Revenue Service (IRS) is concerned, it doesn’t matter to them which route you go, so long as you can prove it if audited. As far as the tax payer goes (you), often times the tendency is to take the quicker path to completing the tax return.
Think about it, will your CPA / Accountant really spend the time and effort to ensure you get the most money back? It means more time wasted for them that leads to less clients they can service and therefore less in fees generated.
Here are just some of the cost components to consider when contemplating the motor vehicle deduction:
- Cost of fuel
- Parking Charges
- Insurance Premiums
- Maintenance and Repair
- Toll Charges
Notice the vehicle tax deduction is not part of this list. That is a separate deduction all together available on the sales tax you pay when you purchase a brand new vehicle.
The insurance on a luxury vehicle costs more than a standard vehicle. The fuel costs on a larger gas guzzler will cost more than a Honda civic. Maintenance such as oil changes and flat tires will definitely cost more for a luxury vehicle, especially if it is also large.
Will your Accountant care? Likely not. So don’t assume that taking the mileage deduction is the best vehicle deduction you can take, not if you drive a Cadillac Escalade no. Analyze your actual expenses and see if the actual expense deduction method makes more sense for you.
Just make sure you keep a good track record of expenses and mileage drive. The IRS requires you to log these expenses near the time of incurring them. You don’t need to fear an IRS Audit as long as your records are tight.
Readers: Which route do you take when claiming the vehicle deduction? Why? Has anything changed after reading this post? Read what the IRS has to say about taking the vehicle deduction.
Sunil
Choosing Wisely
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I don’t personally take a deduction for vehicle expenses, but several years back did plenty of income tax returns on the side. Never once did I see the actual expenses taken. Of course, every time I asked the CPA I worked for about it, I was told it never makes sense to. Like you said, viewed as a waste of time to look into it.
If I remember correctly (several years passing have clouded my memory), I think there are some luxury vehicle limits that blunt the attractiveness of the actual expense deductions for larger and more expensive vehicles.
very true Joe, and on the slip side, some very expensive vehicles have out of the world deductions that are not allowed otherwise. think Nissan Leaf type cars…
i think it is effective for a while,unless you keep your saved money aside and didnt spend it on other things.
welcome Zaher. FYI – the link under your name is actually a link to one of my sites. might want to change that to yours.
One thing very few have thought of in today’s day and age is tracking your _own_ vehicles mileage via a self contained GPS tracking unit. The type I am talking about doesn’t send your data anywhere .. in the trade it is often called a ‘trip logger’.
My first year as an independent consultant I thought I was doing a good job tracking my business use with one of those ubiquitous “Dome” log bools. But come tax time, there were almost 1200 odometer miles on th car over and above the logged iles in the book?
I doubt this is a totally unique outcome. Trying to remember to always write down beginning and ending mileage, etc., is a real PITA.
But a data logger will record every single trip .. in near real time, about as “contemporaneous” as the IRS could possibly hope for. And you can print out monthly reports that show the time and destination of every trip to give evidence of business or pleasure use.
Thousands of businesses equip their company vehicles with these devices because they give a huge payback. There is no way that an individual can’t get a good ROI (especially since there is no month cost to factor in) by ‘tracking’ him or herself. ROI is the name of the game.
great contribution Dave and welcome to the blog. I am a big fan of automation. can you share some specific devices that are effective and cost efficient?
There are dozens of sub-$100 USD units out there which will do the job, Sunil.
I write a lot on GPS tracking related subjects, but I have no time or inclination any longer to keep up with the current US market (I’m an Americna who escaped overseas and won’t be coming back … living abroad is too financially and emotionally satisfying.
Here’s the specs on a typical unit (it’s on Amazon) which will easily pay for itself over and over again:
————————-
Product Features and Technical Details
Product Features
Easily organize mileage details by date, location, mileage, meeting
Export trip records to Microsoft Excel for further analysis
Create IRS compliant mileage reports
No monthly fees are required
Supports trip merging, splitting and exporting
Technical Details
Brand Name: GiSTEQ
Model: TripBook TB-100
————————-
There are many more brands and models in this market segment.
As bloggers, many may notice guys like John Chow who take frequent trips, go out to dine, etc. and always write specifically about their trips. Anyone want to make a bet as to whether or not John tracks and claims his mileage and entertainment deductions?
As of now, I believe the IRS standard deduction is $0.555 per mile. Even a stay-at-home blogger/IM entrepreneur goes out to check his/her PO box, drive to the office supply store, meet with fellow bloggers/interview people, etc. A 10 mile round trip to the PO box, once a week, comes up to more than $288 bucks, right off the bottom line of your business.
Business miles can add up, IMO. The only way to actually escape taxes (within the USA, anyway) is to make no money. If you make any money, you’re going to have to pay … might as well take all the legal deductions available.
good stuff Dave and will def look into this further. where did you escape to and why? how long have you been away? I haven’t ruled out living outside the USA down the road…
I moved to the Philippines six years ago. Only one regret so far … that I didn’t do it sooner.
In my case I waited out the time for a nice pension, and for those who have that option, probably that is the best decision.
But many readers here, I suspect, are people who are making/trying to make substantial income online, and maybe nurturing the dream of “someday”.
Well, when you are relatively young and in your earning years may, in fact be the best time … it’s hard to say.
Major advantages for me:
Cost of living
Taxes (a biggy)
Freedom for nonsensical state taxes, especially sales tax ripoffs like Amazon and other affiliates suffer
And freedom from the whole spectrum of fear-mongering and various “wars” on this and that which have grown to consume the mind of the average, formerly self-reliant and independent-thinking American.
Also, as an “older American” (I’m 66), I enjoy living in a country where elders are respected rather than crapped upon.
Those interested can read a lot more on my blog. There are hundreds of thousands of us “expats”, and the number rises steadily every year.
where in the Ph? if you have read my About section then you know I was born and raised in Manila. true comment on respecting the elders.
good to hear this side of you. will def reach out on my next visit. magandang gabi Dave..speak soon
I’m living in Bulacan, just outside metro Manila.
Embarrassed to say I haven’t read your “About” .. I shall go and correct that discrepancy soonest.
Always ready to hook up with fellow bloggers, just drop a line any time you’re going to be in the area. I’m not planning on leaving any time soon.
Very informative post Sunil! This could have helped me a few years back when I ran a cleaning biz and had to drive all over the place. Driving a F150 is no honda civic. Just curious I was reading your other article on building the website structure and was wondering how many sites to you operate? I saw the paintball and bamboo ones and then you have this so that already 3 at the least.
what cleaning biz did you run and why did you stop it?
I have over 20 niche sites now, the number fluctuates due to sales and new site creation. this blog is where I document my personal finance and entrepreneurial experiences, experiments, stories, etc.
Thanks Sunil.
Also remember that you still have to calculate business miles and personal miles even if you take actual expenses. The actual expenses are reduced by the percentage of personal use.
Agree Jeff. It is important to have good personal records to justify your tax position