Should you buy or lease vehicles for your small business? Well, it depends on the vehicles' purposes. The costs of operating and maintaining your vehicles could turn into tax deductions.
If you use your automobile or reimburse an employee for using an automobile, you have
two methods available for claiming car and truck expenses on your federal income tax forms. The two methods are
actual expenses or the
optional method.
Actual Expenses
If you use the actual expense method, you will claim the business portion of the
actual expenses paid to run the vehicle. Actual expenses include the cost of gas, oil,
insurance, tires, licenses, repairs, garage rent and cleaning. If the car is rented,
the lease or rent amount is also deductible (within limitations).
If you own the car, you can claim a depreciation tax deduction (
see depreciation).
Optional Method (standard mileage rate)
The second method is known as the optional, or standard mileage rate, method. Business
owners who own or lease their cars and who don't operate a fleet of vehicles for their
businesses are eligible for this method.
Under this method, the total business miles driven during the year are multiplied by
the standard mileage rate, which is 44.5 cents for 2006. Business owners should take
this into account when calculating income and expenses or paying the expenses of
employees.
Note: The optional method may only be used if you: 1) own the car and used the
optional method in the year the car was placed in service (for vehicles placed in
service after 1980), or 2) lease the vehicle and use the optional method for the
entire lease period.
(For leases beginning before Jan. 1, 1998, the entire lease period means the part of
the lease period after Dec. 31, 1997.)
Additional Expenses
The standard mileage rate is considered to cover most of the ordinary expenses listed
under the actual method. However, certain expenses may be claimed using either method.
These include:
- Parking fees and tolls
- The business-use percentage of finance charges paid on the purchase of the
vehicle (only applies to the self-employed)
- The business-use percentage of personal property taxes paid on the vehicle
(only applies to the self-employed)
