Taxing Cars

Most small business owners use the same vehicle for business and personal use. To get the best tax breaks, the car should be used more than 50% for business. Of course, as with everything else related to taxes, there is much to know.

There are two alternative methods available for deducting car expenses from taxes. One is the “mileage method,” which involves multiplying the number of miles driven for business times the IRS allowed rate for that year. This is the most straightforward method.

The second way to get this tax benefit is the "actual expense" method. With this method you can depreciate the purchase price over time based on IRS depreciation rules, provided that you meet the 50% usage requirement. You can also deduct the operating costs, which may include gas, maintenance, etc.

Of course the "actual expense" method has caps (annual dollar limits) on motor vehicle deductions. This means you can’t take more than a pre-defined amount for the first year the car is used for business, more in the second year, yet another amount in the third year and finally another amount for the fourth and subsequent years. You must also reduce these amounts by the percentage of any personal use.

Of course, the tax code doesn't make figuring out the annual depreciation deductions easy however there are IRS tables to guide you through the process.

There is a small bit of good news: IRS tax rules are more lenient for electric vehicles, trucks and heavy multi-purpose vehicles (AKA SUV's in the tax code). This means that if you have a qualifying SUV, you can fully depreciate it in six years, regardless of the cost.

Leasing vehicles works a little differently. Business car lease expenses can be deducted, no matter how much the monthly payment, which beats the "caps" mentioned earlier. Of course there is one catch: IRS leasing tables provide that some amount of income must be attributed personally to the lessee in order to equalize the tax advantage of leasing. This is alright because in reality, the added income is significantly lower than the cost of owning and operating a similar vehicle.