Posted by Income Taxes and Bookkeeping LLC

Need-to-Know Tax Deductions for Your Small Business Vehicle

For small businesses, every tax deduction counts. Each deduction lowers the amount of taxable profit that your business must claim. Vehicles can be a good source of deductions, as long as you keep meticulous records about how the vehicle is used. Be sure and mention to your tax preparer that you have or purchased a vehicle for work-related use so he or she can locate all of your potential deductions.

In fact, you may want to speak with your Winchester tax preparer before you purchase a vehicle to determine if there are any limitations that you need to consider for tax purposes. If you have already purchased a vehicle, Income Taxes and Bookkeeping can help with that as well. Below are just a few of the many tax deductions that could be available for your small business vehicle.

Section 179 Deduction

If you are in the market for a new vehicle, you may actually be able to take a large deduction for its purchase. Section 179 allows you to take an immediate deduction for equipment and vehicles used in your business. This is instead of deprecating the vehicles little by little over several years. The legislature enacted this section partly to encourage small businesses to make these large purchases, and “invest in themselves.”

In the past, you might have been able to claim an entire, expensive vehicle. Today, however, there are certain limits in place for the deduction when it comes to vehicles. First, the vehicle should be a qualifying passenger vehicle, and it cannot be vehicles such as:

·      Ambulances

·      Hearses

·      Taxies

·      Transport vans

·      Other vehicles designed to transport property or people for a fee

·      Vehicles that only have seating in the front

The vehicle should also be used at least 50 percent of the time by or for the small business. That means that you can also use it for limited personal reasons and still claim the deduction. The deduction on larger vehicles (over 6,000 pounds) is limited to $25,000, but even with this limitation, this deduction can result in a significant tax savings. This limitation may be much less for smaller vehicles, so check with your Winchester tax preparer for more information.

Mileage and Vehicle Expenses: Actual Expense Method

Most small businesses realize that they can deduct for mileage on their business vehicle. However, many do not bother to track it throughout the year. This is a huge mistake because there can be a significant cost savings as you use your work vehicle.

If you do track your mileage and expenses, there are two expensing methods that you can use. The first is the “actual expense method,” and it works just as it sounds. You track all of your expenses for the vehicle and you are able to deduct every penny that went toward the vehicle. Examples of expenses include:

·      Repairs

·      Maintenance (oil changes, tires, etc.)

·      Gas

·      Tolls

·      Parking costs

·      Car loan interest

·      Rental or lease payments

·      Garage rent

·      Insurance

·      Any other business-related driving cost

Using this method means that you track all of your expenses, but you do not have to track each mile that it was driven. If you use the actual expense method, you can also depreciate your vehicle on a yearly basis, adding to your total cost savings.

Mileage and Vehicle Expenses: Standard Mileage Rate Method

The other method is the “standard mileage rate method.” Using this method allows you to take a deduction for actual miles driving, tolls, and parking fees. You may also be able to deduct interest on your car loan as well. In 2015, the standard rate per mile was 57.5 cents. You do not have to track your actual expenses with this method, but you should track your business miles driven.

You can only use the standard mileage rate method if you have not taken any accelerated deprecation benefit, like the Section 179 benefit. You must also choose this method from the first year that you start driving the vehicle. Usually, however, the actual expense method results in a larger deduction for small business owners.

Part-Business, Part-Personal Vehicles

If you only use your vehicle for partially business purposes, you can only deduct for the percentage that you use the vehicle for business. For example, imagine that you use the actual expense method and find that your expenses are $5,000 for the year. However, you only use the vehicle for business expenses about half of the time. That means that you can only take half of the $5,000 as a business deduction, or $2,500.

One of the only ways to track business use, however, is to compare your business miles drive to your total miles driven. So that may mean that you must track your miles even when you use the actual expense method.

Using a Tax Professional

Tracking your expenses is hard enough—your small business should not have to figure their tax benefits on its own. Instead, Income Taxes and Bookkeeping can maximize your deductions by helping you determine which expense methods work best for you and your business. Find out more by clicking the profile link below or using the Contact button.

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