One of the ways to significantly reduce your business income tax is the business use of a vehicle. It is an important entity that you can use to bring down your tax for two reasons:
The business income is primal to calculating the personal income tax.
It is also used to calculate the self-employment tax, which comprises the Medicare and Social security tax.
As a result, it is vital to maximizing deductions in your vehicle's business use to bring down your tax return.
In calculating the business use of a car, two methods exist. The good idea is to estimate the vehicle expenses using both ways and go with the one that produces the largest deduction.
The Actual Expense Approach
These are real expenses one incurs from day to day use of a vehicle. These are expenses like
Tickets
Purchase of gas
Car washes
Insurance
Changing tires
Changing of oil
Vehicle depreciation
However, the claim applies to a percentage of the expense that relates to your use of the vehicle for business purposes. This involves knowing the exact mile driven for business purposes alongside the mile you drove for personal purposes.
In estimating this percentage, you will have to divide the entire business miles by the total miles you drove in that year (personal and business purpose).
For example, for an annual summary that reveals that you drove 6000 miles online while the odometer shows that the entire mile driven is 15,000 miles, you will divide 6000 by 15,000
This will give 0.4 or 40% - the percentage of your vehicle use for business purposes.
After that, you will multiply your total expenses with the percentage gotten above to get the actual expenses deduction.
Still, with the previous example, someone with a total expense of $15,000 will multiply the value by 40%.
The deduction value will be $6,000 ($15,000 X .40 = $6,000 )
Standard Mileage Approach
While you will have to track your personal and business miles with this second approach, calculating your deduction with this second method requires only the business method. Still using the above example, the driver logged 6,000 miles. You will have to add these to any extra business mile to get the entire business mile.
Using the standard mileage approach, one needs to multiply the business mile value by the amount per mile specified by the IRS.
The value is 57.5 cents per mile for the 2020 tax year. For our example, the value of the deduction will be $2,308 (4000 miles x $.575 = $2,308)
Theoretically, one should get the same result using both methods of estimating your vehicle's business use. However, there are times when low mileage and huge expenses could translate to a higher deduction value using the Actual expense method.
Assuming the driver had higher mileage, there would have been a larger deduction from the Standard Mileage method.
Conclusion
It is important to remember that while your vehicle plays a significant role in reducing your tax bill, there are other business deductions one can take. There are lines where you will enter other forms of business expenses in the form required for calculating the net business income.
In the same way with using mileage, it is the only expense related to business that can be deducted. For an item used with both business and personal life, it is essential to estimate each percentage.
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