Almost all business owners use their personal vehicle for business purposes. And there’s nothing wrong with that, as long as they keep proper records.
If your business is chosen for an audit, you can bet the auditor will take a good look at the business vehicle deduction. And to be frank, this is sometimes the red flag that caused the audit.
Every year, clients come in and when I ask how many business miles were driven last year, you’d think the answer was written on my ceiling. The usual response after the upward eye roll is, “Well, let’s, just take what I put down last year and add some to it.”
Well, that’s not going to fly.
As a business owner, it’s important to document your total mileage as well as your business mileage. Here are some things you should know about taking the deduction:
Record your beginning and ending odometer readings. Be sure to write down your mileage at the beginning and ending of the year to establish an accurate accounting of total miles driven. Try to document business miles as well. The IRS requires a contemporaneous accounting of business use, but rarely do they find that in audit. Over the past 25 years of representing taxpayers in audit, I’ve been able to convince them to accept a reconstruction.
If you have a home office, your business mileage begins from that home office to your business destination. If your business is located outside the home, you are not allowed to write off your commute mileage to your place of business.
Actual expenses vs. mileage. If you use your personal vehicle more than 50% for business, you may elect to deduct your actual expenses. These expenses include: gas, oil, registration, insurance, repairs, garage rent, car rentals, car washes, tires, depreciation, etc. To calculate the deduction, you find the percentage of business use then use that percentage against the total of all expenses.
If you use your personal vehicle less than 50% of the time for business, you must use the IRS mileage rate method. Calculate the number of miles driven for business and multiply by the IRS mileage rate to determine your deduction. For 2013, the mileage rate was 56.5 cents for 2014 it has been reduced to 56 cents.
Know your depreciation. Depreciation is allowed if you own your vehicle and use it more than 50% for business. Years ago, taxpayers were allowed to depreciate vehicles, no matter their cost, over a three- year period. But the IRS cringed when it saw big deductions for high-end cars and consequently changed the rules. Vehicles are now depreciated over a five-year period.
The maximum first-year depreciation you can take on a passenger vehicle is $3,160, second-year depreciation is limited to $5,100, third year to $3,050 and fourth year and beyond to $1,875. If you purchased a new vehicle in 2013, you may take an additional $8,000 in bonus depreciation. Whether bonus depreciation will be extended through 2014 and beyond, remains to be seen. We don’t expect a decision on this until the fourth quarter.
Certain “qualified nonpersonal use vehicles” such as dump trucks and taxis and ambulances as well as trucks and SUVs weighing more than 6,000 pounds continue to be exempt from the above depreciation limits or the written mileage documentation.
A “qualified nonpersonal use vehicle” is defined as one that is modified in such a way as to not be suitable for more than a de minimus amount for personal purposes.
Bonnie Lee is an Enrolled Agent admitted to practice and representing taxpayers in all fifty states at all levels within the Internal Revenue Service. She is the owner of Taxpertise in Sonoma, CA and the author of Entrepreneur Press book, “Taxpertise, The Complete Book of Dirty Little Secrets and Hidden Deductions for Small Business that the IRS Doesn't Want You to Know.” Follow Bonnie Lee on Twitter at BLTaxpertise and at Facebook.