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
. 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.
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.)