Saturday, January 22, 2022

Americans love their cars. Case in point: In 1999, a Tennessee man, Buster Mitchell, tried to get married but was denied by county officials. You’re probably thinking, why would they deny poor Buster one of his most fundamental rights? The love of his life was not his high school sweetheart nor was it the woman of his dreams, but rather his 1996 Mustang GT sports car. His marriage application listed the Mustang’s birthplace as Detroit, father as Henry Ford, and blood type as 10-W-40. When the clerk refused to issue him a marriage license, the man said he would never give up on his dream to wed his only true love. At the time of this article being published, we are still not allowed to marry our vehicles in the United States. That being said, there are still ways to deduct expenses related to your car without a wedding ceremony and filing a joint return.

Before I discuss how you can deduct car expenses, it’s necessary to discuss who can deduct car expenses. The average employee who commutes to and from work may not deduct any of those expenses, as those are deemed to be personal expenses. However, if you use your car for anything work related, other than simply commuting from home to work, you can deduct some of the costs of keeping it on the road. So if you have a regular job at an office, you never deduct your commuting mileage. But once you get to work, if your boss requires that you use your vehicle for business travel, mileage for which you are not reimbursed is deductible. The typical example of deductible transportation expenses is if you work at two different places then the commute from Workplace A to Workplace B is deductible. Just make sure not to stop at home in between since that would render the commute to Workplace B as not deductible. However, this is where it can get interesting—if you are self-employed and have a qualified home office, then your commute is defined as travel down the hall or through the yard to the specific area of your home that you use as your office. So if your home office is in your basement, for example, your “commute” was essentially your walk from your bedroom to the basement. Once you are in the office (basement), then every destination to which you travel for business is considered business mileage.

Now the question is: What exactly can you deduct? Assuming you use your car for both business and personal, which is the case for the majority of vehicles, you first should determine the business-use percentage by dividing the business miles by the total miles driven. For example, 5,000 (business miles)/10,000 (total miles) =.50, or 50 percent. Now that you know the percentage, you need to decide what method to use to deduct your expenses. There are actually two different methods of deducting car expenses: (1) actual expenses and (2) the IRS standard mileage rate.

Actual Expenses Method: If you choose the actual expenses method, you can deduct repairs and maintenance, cost of gas, vehicle registration fees, insurance, tires, car loan interest, lease payments, garage rent, parking, tolls, depreciation, and even car washes. You would add up all of these expenses and multiply by your business-use percentage. This seems like a great deal, so what’s the catch? The catch is all the record keeping involved. You need to keep meticulous records of all your expenses and keep all receipts and documentation in case of an audit. Most people are either too lazy or just don’t care enough to keep track of all these expenses.

IRS Standard Mileage Rate: Under this method, you deduct a certain amount (the standard mileage rate) for each mile driven, plus all business-related tolls and parking fees. In 2015, the standard mileage rate is 57.5 cents per business mile driven. Now, I just filled up my car last week for $18. I can get about 300 miles on that $18 tank of gas. If I were to use those 300 miles on business travel then I would get a deduction of $172.50. According to my calculations $172.50 is a lot more than $18. Now, while the IRS regulations state that you must keep a contemporaneous mileage log, which means you’re supposed to mark down your mileage as it occurs, this is the equivalent of parents telling children to make their beds and not fight with their siblings. Both know that it’s not likely. There’s almost an implicit understanding with the IRS that the overwhelming majority of people reconstruct their mileage logs as best as they can at year end.

So which method should you use? Well, like most things in life it all depends. Generally, if you use a newer car primarily for business, the actual expense method provides a larger deduction due to the ability to expense the depreciation on the car. However, the standard mileage rate is much easier to keep track of and with gas prices as low as they currently are, this provides a nice tax deduction as well. It should be noted that in order to qualify for the standard mileage rate, you must use it the first year you use a car for your business activity. Also, you can’t use the standard mileage rate if you have expensed depreciation in prior years.

Daniel Magence, CPA, Esq. is a principal at Pristine CPA Solutions, LLC (www.pristinecpa.com). Pristine CPA Solutions offers tax and accounting services to individuals and businesses of all sizes. He can be reached at [email protected] or 201-326-6908 if you have any question or comments or are interested in using Pristine CPA’s services.

By Daniel Magence

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