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There are a number of significant tax advantages to having a business, not the least of which is your automotive deduction. Yet, if you want to lower your tax bill and get the highest possible savings, you need to know exactly how to handle this. If you do it right, you’ll drive your tax bill lower. If you do it wrong, you’ll turn the wrong way and could end up in a head-on collision with an IRS audit.

Here are some car-related expenses and approaches that could save you money come tax time:

  1. General business use. IF you have a vehicle that you use solely for the operation of your business, you can deduct the entirety of the cost of the vehicle. Of course, if you’re like most small business owners and you actually use your vehicle for both business and personal reasons, you can still only deduct the portion of the use that goes toward your business. So, if you have a catering business and a delivery van that you use exclusively for that business, you can deduct it all; if you have an SUV that you also use for family vacations, you can only deduct a percentage. The operating expenses usually covered in business use include gas, vehicle maintenance, car loan interest, repairs, and even auto insurance.
  2. Business mileage. When you have a vehicle that you use for your business part of the time, one option is to claim the current mileage rate. For 2019, the rate is 58 cents; it was 54.5 cents in 2018. The rate changes for most years. It’s a standardized way to deduct the cost of using your vehicle, rather than actually itemizing out all of the direct costs for your vehicle. You do need to record the mileage as it’s shown on your odometer; if you estimate your mileage and are audited, you might find that the deduction is disallowed. (Even if you don’t have a business, you can usually deduct any mileage that you drive when doing work for charities, or even when you’re driving for medical purposes, such as driving a child to a doctor’s appointment.)
  3. Vehicle depreciation. Each year, your vehicle drops in value or depreciates. If you use your vehicle for work, you can claim a certain percentage of this loss each year. There is a formula that your tax expert can help you use in order to determine how much this actually is. Many small business accounting packages will help you through this process, as well, so make sure you know how it works.
  4. Expense of leasing a business vehicle. If you lease a vehicle to be used in the operation of your business, the entirety of the lease payment can be deducted. In most cases, you can even combine this with specific deductions, including the operating costs of the vehicle. You need to make sure you look closely at your options at tax time, in order to apply the deductions in the way that provides you with the lowest tax burden.
  5. Vehicle sales tax. If you purchased a vehicle in the past year, there is a vehicle sales tax credit. You can deduct the state or local sales and excise taxes. If for some reason you didn’t pay the sales tax until now or if you didn’t claim it before, you may be able to file an amended return. Here, as always, it’s best to talk to your tax professional about how best to handle this.

The key to getting the most from vehicle tax deductions for your business is this: you need to keep meticulous records. You need to be able to demonstrate to an IRS auditor exactly how and when your vehicle was used, and for what purpose. You need to track mileage religiously, keep all of your receipts, and make sure that if you claim a vehicle is only for business use, that it truly is only for business use.

If you have any doubts about how best to use your vehicle to drive down your tax bill, talk to a tax expert today. He can help you figure out the optimal configuration for your tax bill and help you identify the things you need to do to document your use and protect yourself in the event that you do find yourself being audited.

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