Tax Planning: Business Use of Your Vehicle

Tax Planning – ‘Tis the Season!
Business Use of Your Vehicle

Now is the time to plan for tax deductions rather than at the accountant’s desk in April.  Taxpayers miss out on many tax breaks each year due to failure to plan.  In the next few weeks, we will cover some of the most misunderstood tax planning considerations.

Let’s begin this series by taking a look at the

business use of your vehicle.

Generally, there are two methods used to calculate the vehicle expense deduction:  the standard mileage rate method or actual expense method.  Your tax accountant can figure the deduction both ways to see which one provides the larger deduction.

The Standard Mileage Method

2013:  56.5 cents per mile
2014:  56 cents per mile

The Standard Mileage Method includes parking and toll expenses incurred for business purposes. 

The Standard Mileage Method cannot be used if you use five or more vehicles at the same time, claimed a depreciation deduction for the vehicle using a method other than straight-line, claimed section 179 deduction, used the Actual Expenses Method on a car leased after 1997 or you are a rural mail carrier and received a qualified reimbursement.

• Owned vehicle Standard Mileage Method:  You must choose the Standard Mileage Method the first year you place your car in service.  After this first year, you have a choice between the Standard Mileage Method and the Actual Expense Method.  If you use the Actual Expense Method in the first year, you must use that method in all later years.
• Leased vehicle Standard Mileage Method: You must use the Standard Mileage Method for the entire lease period.

The Standard Mileage Method may appear to be simpler; however, depreciation is built into each mile.  There is a depreciation adjustment that effects the basis of the vehicle.  The basis must be reduced by the amount of the depreciation included in the standard mileage rate.

The Actual Expenses Method

• Owned vehicle Actual Expenses Method:  Depreciation, Loan Interest, Licenses, Fuel, Registration fees, Insurance, Repairs, Maintenance, Oil, Garage rent, Tires, Tolls, and Parking fees.
• Leased vehicle Actual Expenses Method:  Lease payments, Licenses, Fuel, Registration fees, Insurance, Repairs, Maintenance, Oil, Garage rent, Tires, Tolls, and Parking fees.  You can use the Actual Expenses Method to figure your deductible expense.  You can deduct the part of each lease payment that is for the use of the vehicle in your business.  Advanced payments must be spread over the entire lease period.  If the lease is greater than 30 days, you may have to reduce your lease payment deduction by an inclusion amount. 

Depreciation:  If you use actual expenses, you can claim a depreciation deduction.  This can be a complicated calculation and I recommend using a tax accountant to set up depreciation the first year you place a vehicle in service. 

If you use your car more than 50% for business purposes, you are able to use the Modified Accelerated Cost Recovery System (MACRS).  If less than 50%, you must use straight-line depreciation.

Depreciation methods: 

• ·         MACRS 200% declining balance method over a 5-year recovery period (greater deduction in earlier years tapering off each year)
• ·         MACRS 150% declining balance method over a 5-year recovery period (greater deduction in earlier years tapering off each year)
• ·         Straight-line method over a 5-year recovery period (equal deductions over the recovery period)

Whether you lease or buy, you must maintain mileage logs to track the percentage of expenses to deduct.  There are many nuances to vehicles and deductions.  It is important to get it right.  Take the time now to look at your vehicle usage and evaluate the right method that will give you a larger tax deduction.  If taxes are too taxing for you, let the professionals jump in…it is what we do.  Don’t record unplanned history in April 2015, plan now to create a better tax outcome.

For more information, please see IRS Publication 463:  2013 Publication 463