NFIB

Mapping Out an Auto Expensing Strategy
03/ 28/ 2002

by Melany Klinck

To use the standard mileage deduction or to deduct actual car expenses? That question drives many small business owners directly to an accountant. But you don't necessarily need a tax guru to help you decide which method is right for you. Ask yourself these questions:

1. What percentage of my car usage will be for business?

To find the answer, divide the number of business miles you drove last year by your total mileage. Then estimate whether your usage for the current year will be higher, lower or about the same.

Tip: Understand what constitutes "business mileage." Commuting between your home and office is not deductible. But if your principal place of business is your home, you can deduct the cost of travel from your home to any business destination.

2. Will I use my vehicle for business less than half the time?

If so, you're generally better off using the standard mileage deduction (32.5¢ for 2000). This takes into account average vehicle costs, including depreciation, gas, repairs, etc. You can also deduct parking fees, tolls, and the percentage of finance charges and personal property taxes that equates to the business use of the car.

Tip: If you bought a new car or anticipate expensive repairs, run the numbers to see if you'll get a bigger deduction by using the actual-cost approach. Simply multiply your projected annual expenses, depreciation allowance, etc. by your business-use percentage.

3. Will my vehicle be used for business more than half the time?

If so, the actual-cost method may yield a bigger deduction. By using your vehicle more than 50 percent for business, you qualify for accelerated depreciation deductions, which boosts write-offs in the early years of your recovery period. Furthermore, when you buy a new or used car, you can take a "Section 179" deduction and treat part of the cost as a current expense. These deductions have limits ($3,060 for both in 2000).

Tip: Before using the Section 179 deduction or accelerated depreciation, you'll want to be reasonably certain the business usage of your vehicle will remain above 50 percent during the recovery period. If usage drops below 50 percent, you'll have to revert to straight-line depreciation and add any "excess depreciation" back to your gross income. Ouch!

4. Am I a whiz at record-keeping?
If you're not prepared to keep meticulous written records and receipts for gas, licenses and registration fees, insurance, repairs, lease payments, etc., choose the standard mileage rate. Many self-employed people opt for simplicity over a slightly higher deduction. Of course, you always need to keep written mileage records.

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This article originally appeared in the March/April 2001 issue of MyBusiness Magazine, NFIB's member magazine.

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