Maximize Your Auto Deduction
As a dentist, it is more difficult to get the same large auto deduction that your contractor buddy gets. This is due to the fact that commuting miles (home to office) are not business miles. In order to deduct auto expenses, the use of the vehicle must be for business. Business use generally means travel between two business destinations, one of which may include your regular place of business. Typical trips that are deductible include:
travel from one office to another (if you have multiple locations)
travel from your office or business location in order to perform business tasks, such as to pick up supplies and inventory, to check your business post office box, or to make a bank deposit
travel to meetings for marketing or CE purposes
Here are three simple tips to maximize your auto deduction:
1. Be strategic about your daily travel
While commuting expenses are never deductible. This is true even if you have an advertising display on your car, or you use the commute to listen to business books on tape or to phone your patients.
However, remember you can deduct the cost of traveling between your home and a business location that is not your regular place of business. You can take advantage of this rule by planning your day so that you make a business related-stop on the way to work and on the way home, thereby converting a portion of your otherwise nondeductible commute into deductible business travel. Be strategic:
check your PO Box on the way to work
stop by the bank to make a deposit on your way home.
2. Determine whether actual cost will be higher than the standard mileage rate.
The standard mileage rate (SMR) is the easiest method to use to claim your automobile expense deduction. The IRS allows you to deduct 56 cents per business mile on your 2021 income tax return. If you use the standard mileage rate, then you need to worry only about the odometer reading and the business purpose of your trips. The rate is the same regardless of the age and cost of the car.
For the actual cost method of determining your vehicle deduction, you must keep track of the actual amount of your costs during the year to calculate your deductible vehicle expenses. The amount of your deduction depends, to a large extent, on how good you are at saving receipts and jotting down your costs throughout the year. The cost of operating a vehicle includes cleaning, fuel, insurance, license fees, repairs and tires. The purchase price of the vehicle is also deductible by depreciating it over the first 5 years of ownership. When using actual expenses, you must multiply the total dollar amount you actually spent by your “Business Use Percentage”. (ie., if you drive 10,000 miles, and 6,000 miles are for business use, then your Business Use Percentage is 60%). The actual mileage method can also create a taxable gain when you sell or trade the vehicle.
We have found that for 90% of our clients, the standard mileage rate works the best. It allows you to still get a sizable deduction beyond the 5th year of ownership and eliminates any potential capital gains issues. The key is to decide at the time of your vehicle purchase as you can not elect to change method once you start.
3. Make the decision that you’re going to ‘up your game’ on record-keeping.
Most business owners hate the record-keeping and tax rules set by the IRS. But auto expense is the single most audited expense category on a small business tax return. Keeping a mileage log and solid record-keeping is not an option. The real truth is, it’s really not hard to do.
We recommend the old fashion logbook in the car or a smart phone apps, like MileIQ, that uses your phones built-in technology to diligently track all your business and non-business trips. You simply need the daily diligence to classify each trip as either business (swipe right) or non-business (swipe left) before your head hits the pillow.
If you decide to use the actual expense method, you must track mileage AND your vehicle cost. Take a photo of the receipt each time you put gas in the car, run it through the car wash, or visit the mechanic.
For more information on steps you can take to maximize your vehicle deduction, contact JNG Advisors to see how you can maximize your auto expenses.