Make the right choice for your driving costs

Taxpayers who drive a car for business generally may use one of two methods for computing car expenses: the actual cost method or the standard mileage rate method. The standard mileage rate may not be used in certain situations; the actual cost method may be used by any taxpayer.

With the standard mileage method, you simply multiply your business miles driven during the year by the IRS’s standard rate. The rate, which is set by the IRS each year, is 48.5¢ per mile for 2007. If you use the standard mileage deduction, you can also deduct related tolls, parking fees, and the business portion of interest expense on your car loan. (Interest expense is not deductible by employees.)

With the actual cost method, you can deduct the actual expenses of operating the car for business. These expenses include gas, tolls, insurance, parking, repairs, maintenance, registration and license fees, loan interest (except employees), and depreciation.

Regardless of the method you select, you need records to support the deduction. You’ll need to keep track of your mileage under both methods, but the actual cost method requires more recordkeeping than the standard mileage method.

Only the business portion of your total mileage is deductible. For example, if your business mileage is 15,000 and your total driving mileage is 20,000 this year, you can deduct 75% of your total automobile expenses if you choose the actual cost method.

If you choose the standard mileage method, you multiply your 15,000 miles of business driving by 48.5¢ a mile and deduct $7,275.

You might be inclined to choose the standard mileage rate to simplify your recordkeeping, but before you opt for this method, consider the potential impact of each method on your tax bill. The price for using the mileage rate’s simplicity may be lost deductions. If you drive often or long distances for business, or if your car expenses are high, the alternative actual cost method may be better.

If it’s advantageous, you can switch to the actual cost method even if you started with the standard mileage rate. Be aware, however, that once you begin using the actual cost method on a vehicle, you can’t switch to the standard mileage deduction for that vehicle. In making your decision, you should consider how long you’ll keep the car and the estimated total tax savings under each method.

The rules governing business car deductions are full of exceptions and limitations. To be certain you use the method that’s right for you – and that maximizes tax savings – give us a call. We can review your situation and your options with you.

* Actual costs Business portion of:

• Gas and oil.
• Repairs, maintenance, tires.
• Insurance and licenses.
• Depreciation (including first-year expensing election), subject to limits adjusted annually for inflation.
• Car loan interest (except employees).
• Car lease payments (special rules).
• Parking fees and tolls.
• Standard mileage rate
• Business miles driven times 48.5¢ a mile.
• Parking fees and tolls.
• Business portion of interest expense on vehicle loan (except employees).