Deducting small business expenses is one of the best ways to lower your tax bill. For many businesses and individual entrepreneurs, one of the most advantageous deductions is the automobile allowance. This deduction allows you to reduce your income based on the expenses you incur when using an automobile for business purposes. Follow the tips below to calculate this deduction accurately in 2016.
- Know whether you can deduct business mileage.
In general, you can deduct expenses for cars, pickup trucks and SUVs that are used in the course of your business. However, you cannot deduct expenses related to the use of vehicles for hire or vehicles that qualify as equipment, such as dump trucks. You are also unable to deduct any expenses related to you or an employee's personal use of a business vehicle. If a vehicle is used for both business and non-business purposes, you must deduct only the portion of expenses that pertain to business use.
- Decide which calculation method to use.
Two different calculation methods are available to taxpayers deducting business mileage. One method, known as the "actual expenses" method, involves calculating the actual expenses you paid for the vehicle throughout the year. Examples of expenses that can be included in this calculation are the cost of gasoline, required repairs and oil changes. If you used the vehicle for both personal and business purposes, only the portion of expenses that pertain to business use can be included in the calculation. The other calculation method is known as the "standard mileage rate" method. To use this calculation method, simply calculate the number of miles driven for business purposes during the year and multiply it by the IRS' standard mileage rate for that tax year. For 2016, the IRS has announced that the standard mileage rate for business miles will be 54 cents per mile. This rate is slightly lower than that of the previous tax year. To determine which of these calculation methods is more beneficial, calculate the deduction both ways and choose the larger amount.
- Know the limitations.
In some cases, you may not be able to use the standard mileage rate to calculate your deduction. Specifically, you cannot use the standard mileage rate for more than four vehicles at the same time, after claiming a Section 179 deduction or after using a depreciation method under MACRS. Most miles driven for business purposes are deductible. However, you must omit miles driven to and from work.
- Keep records to support your deductions.
If the IRS audits your tax return, you must be able to provide documentation to support your business vehicle deductions. Keep careful records of all of the miles driven throughout the year, and retain any receipts relating to vehicle expenses. Keep these documents for at least three years after you file your tax return. Calculating your business vehicle deductions can be complicated. For assistance with this complex tax topic, contact Padgett Business Services.
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