If you use your car for business, listen up. You'll want to read this article. Especially, if you hate keeping records of the actual expenses you pay for the business use of your car. You'll like what you are about to read. Instead of keeping records, there's another way to deduct the business use of your car. An easy way. And often, it's a big tax saver too. The "optional mileage allowance method" is the name of this game.
Use this method and keeping records of each auto expense is history. Instead, only two simple tasks capture your full deduction: (1) Keep track of the business miles you drive and then (2) apply the IRS's mileage allowance rate. Every year the IRS announces the rate for the next year. The rate may go up, down or stay the same. Good news... The rate for 2005 is 40.5 cents per mile; up from 37.5 cents in 2004.
Here's an example. Sara Sellum drives her auto far and often for business every year. Sara has had it with keeping records of gas receipts, repairs and maintenance. For 2005 Sara keeps track of only business miles. Suppose she drives a total of 30,000 business miles in 2005. How does Sara figure her auto expense deduction? Simple. Just multiply the 30,000 miles by 40.5 cents. Sara's 2005 deduction is $12,150. Great tax mileage!
Wait. There's more. Sara also can deduct 100% of her business tolls and business parking.
But caution: The mileage allowance is not always your best tax bet. Take advantage of it only if you have neither the time nor the inclination to keep those expense receipts, or if past practice shows that your total actual expenses (including depreciation) are less than the allowance amount. If your actual expenses are more than the allowance, you must decide if the reduced record keeping (mileage only) is worth the smaller deduction. Hint: The more miles you drive, the more likely the mileage allowance will save you tax dollars, as well as time.
A few more things you should know: (1) The 40.5 cents per mile includes depreciation. So instead of computing depreciation separately, 17 cents per mile for 2005 is assumed to be depreciation; 16 cents for 2004 and 2003; 15 cents for 2002 and 2001; and 14 cents for 2000. When you sell or trade your car, just reduce your tax basis by the appropriate cents for each mile you used the optional method. (2) The optional mileage allowance method can be claimed by firms with up to four vehicles that are being used at the same time.
As usual, the IRS falls short when giving a tax break. Try this! The rate for a car used to get medical care or in connection with a move that qualifies for the moving expense deduction inches up to a lowly 15 cents per mile (from 14 cents). But sadly, for charitable activities, the amount remains stuck at 14 cents.