There are two methods to compute the amount of tax deductible vehicle (auto) expense. A taxpayer can deduct actual auto expenses or use the standard mileage rate. While the taxpayer is free to choose either method, both methods require that the deduction be properly substantiated.
Regardless of which method is used, the taxpayer must maintain a contemporaneous mileage book to substantiate the business use of the vehicle. Thus for those taxpayers who want to use actual vehicle expenses, a mileage log book is required to compute the business percentage of the expenses incurred.
The simplest method of computing deductible auto expenses for an employee or self-employed person is the standard mileage rate. The number of business miles is multiplied by the IRS allowed rate per mile (57.5 cents in 2015) to compute the tax deduction. Thus if the taxpayer drove the vehicle for 10,000 business miles, a $5,750 tax deduction would be allowed. Taxpayers with high mileage use will usually find this method will produce the greatest tax savings. In addition to the mileage deduction, the taxpayer is also entitled to deduct parking fees and tolls.
The mileage method cannot be used if the taxpayer used the actual method in a prior year and depreciated the vehicle using a depreciation method other than straight-line or claimed a Code Sec. 179 deduction on the vehicle.
If the actual cost method is used, all operating and fixed costs connected with maintaining a business automobile are deductible (to the extent they are business related). Deductible costs include depreciation, maintenance and repairs, tires, gasoline, oil, insurance, lease payments, license and registration fees. The taxpayer would total all of these expenses, multiple that amount by the business usage percentage, and that would result in the amount deductible for tax, plus the tolls and parking expenses. While self-employed individuals and employees may elect to use the actual cost method, all other taxpayers must use this method along with those businesses with five or more vehicles operating simultaneously.
The biggest challenge taxpayers have is maintaining the contemporaneous log book. Without it, the taxpayer is not allowed any auto tax deduction. Taxpayers who find it difficult to maintain an accurate and contemporaneous log book should look at the various apps available on the Internet and have GPS capability.
If you want to learn more about tax preparation services or tax planning strategies, we invite you to call 610-594-2601 today to make an appointment at our Exton PA CPA office to discuss your situation. You can also schedule a consultation at Click Here.
