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Follow-up from Tuesday's Tax Seminar - What to Know About Writing Off Your Wheels

From: Kent S.
Sent on: Friday, March 28, 2008 10:07 AM

What to Know About Writing Off Your Wheels



FEEL LIKE YOU spend more time in your car than your office?

Small-business owners often rely on their trusty set of wheels to meet with clients, transport supplies and even market the company's name. If you're spending a good chunk of time on the open road for your business, here's good news: You're likely entitled to some nice tax write-offs. And this year, the Economic Stimulus Act provides more tax breaks than usual for business use of cars, trucks and SUVs.

The bad news? Understanding the Internal Revenue Service rules that allow these breaks can be a little daunting even to the most tax-savvy entrepreneurs — which is why hiring an accountant or investing in a good tax-preparation program can be a big help.

The bad news? Understanding the Internal Revenue Service rules that allow these breaks can be a little daunting even to the most tax-savvy entrepreneurs — which is why hiring an accountant or investing in a good tax-preparation program can be a big help.

Here are a number of frequently asked questions that come up when small-business owners are deducting car-related expenses:

How can I deduct the cost of owning or operating a car for my business?

You can deduct costs using one of two methods: the standard-mileage method or the actual-expense method. The standard-mileage method is certainly easiest — you simply track your business miles, then multiply that by a flat rate, which is 48.5 cents a mile for 2007 and 50.5 cents for 2008. So if you drove your vehicle, say, 10,000 business miles last year, your car deduction for 2007 would be $4,850.

The standard-mileage method is designed to ease the burden of record-keeping. Some business owners, however, choose the more labor-intensive actual-expense method in the hopes of getting a bigger deduction. With this method, you deduct all out-of-pocket costs — everything from oil changes to fill-ups at the pump — plus depreciation if you own the car (if you lease, you deduct an adjusted portion of your lease payment). If the vehicle doubles as the family car, you need to divide expenses between business and personal miles. For example, say you drove your car 20,000 miles last year: 15,000 miles for business use and 5,000 for personal use. That means you would claim 75% (15,000 / 20,000) of all those out-of-pocket costs as a business expense.

Read more on car expenses and the myriad rules related to deductions in IRS Publication 463.

I need a car for my business. Is it better, from a tax perspective, to lease or to own?

From a tax perspective, "you're almost always better off leasing," says Frederick Daily, a tax attorney in St. Pete Beach, Fla., and author of "Tax Savvy for Small Business." The reason? Dollar limits on deprecation are typically low — only $3,060 in 2007 — chiefly to prevent business owners from using a tax loophole to own a luxury auto. There are far fewer restrictions when it comes to lease payments, so "leasing generally provides a larger tax deduction than does owning," he says. (For 2008, there are special rules on depreciation, see next question.)

Keep in mind, the decision to buy or lease a car for your business isn't just about taxes. You should also consider your needs and personal preferences. If you don't plan to drive that much (say, less than the 15,000 miles a year that's allowed in most lease agreements) and you prefer getting behind the wheel of a new car, then leasing is probably for you. If you're planning to log countless miles and you don't place much weight on driving the latest-model, then ownership might be the best option.

Does the new economic stimulus package give me a special tax break for purchasing a car in 2008?

Yes. So if you prefer ownership and you're looking for a reason to sign on the dotted line, it's good to do so this year, says Bob D. Scharin, RIA Senior Tax Analyst from Thomson Tax & Accounting in New York. A 50% bonus depreciation provides a more generous-than-usual first-year deduction for new (but not used) cars and light trucks bought and placed into service in 2008. The maximum depreciation deduction has been raised $8,000, which means your write-off can be as much as $10,960 for autos and $11,160 for light trucks (compared to limits of $2,960 for autos and $3,160 for light trucks that were previously in place for this year). One catch: The vehicle must be used more than 50% for business to qualify for any deductions. And it must be used 100% for business to get the full write-off. So if you only use your auto, say, 75% for business, the maximum first-year depreciation deduction would be $8,220 (75% x $10,960).

Are there special tax breaks for SUVs?

Yes. While the amount of depreciation you can normally take for a passenger auto is low, there are more generous tax breaks for so-called "heavy" SUVs, which have a gross vehicle weight rating (GVWR) of more than 6,000 pounds. (You can look up a vehicle's specifications at sites such as This year, a business owner who purchases a new heavy SUV can depreciate most of the cost of the vehicle by taking advantage of the Section 179 deduction (which allows business owners to take an immediate deduction for the cost of certain kinds of equipment), the 50% bonus depreciation, and standard first-year depreciation. See example 4 in this story.

Can I deduct parking fees and tolls?

If you hit the road for business-related travel, such as visiting clients, vendors or customers, you can deduct parking fees and tolls. Even if you use the standard-mileage method, you can take an additional deduction for business-related parking fees and tolls. Keep in mind, though, that regular commuting costs are considered personal expenses. So if you park your car in a fancy garage near your place of work, you can't deduct it.

I've stuck a big advertisement for my company on my car. Do I get to deduct the cost of owning or leasing my car as a result?

There's really no special rule that applies here. If you, say, paid a custom-sign company to splash a graphic on your car, then you can certainly write off that fee as a business expense. Marketing and advertising costs, in general, are fully deductible. (For more on business write-offs, click here.)

When it comes to the car, though, the same rules of business use apply: As long as you are hitting the road to meet with clients, pick up supplies, or for some other business purpose, then you can deduct costs using either the standard mileage or actual-expense method. But just because you've turned your car into an advertising machine doesn't mean you can deduct costs related to personal use, such as trips to the grocery store.



Kent Sovern, Principal

Public Management Resource Group

Des Moines Office

1534 Germania Drive

Des Moines, Iowa[masked]


Office:            [masked]

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E-mail:            [address removed]

Skype:            kent.sovern



Assisting Entrepreneurial Leaders in Government, Associations and Community Based Organizations


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Our offices in Boone, Panora, and Des Moines Iowa are centrally located to serve small business, community based organizations and government leaders throughout the upper mid-west. 



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