Get the most mileage out of your 1040: deducting car expenses, simplified - Finance - Column

Home Office Computing, Jan, 1993 by Linda Stern

Deducting Car Expenses, Simplified

I know a couple--who shall have to remain on deep, deep background for the purposes of this month's column--who recently bought a very nice family car. Outfitted with the latest in CD players and baby safety seats, the new minivan is the perfect family vacation vehicle. And it's unequaled for after-school carpools.

And the car's expense? Forget it, say my self-employed friends. "We just had the business buy it." Wink, wink.

Now I've wondered about this. How is it that they come and go in comfort, if not luxury, without a pen or auto log in sight, while I always struggle to record whether I went 1.2 or 1.5 miles to the copy shop? And how is it that their business can buy a car that sits in their driveway and shuttles their kids most of the time?

The answer is, Maybe they can, and maybe they can't. The rules for deducting business use of automobiles are so complicated that my friends' situation may fit, or it may not.

For example, you can take some deductions for business use of your car even if it's driven mostly on personal trips. So maybe the couple in question just writes off a fraction of their expenses. And, contrary to Congressional posturing and popular belief, you really don't have to keep a contemporaneous log of your mileage, if you have some other way of defending your business use. Maybe my friends keep an impeccable calendar.

Maybe, on the other hand, they are just cruising along in a not-entirely-kosher arrangement in the hopes that they won't get audited. I'm not going to ask, and you didn't read it here.

THE IRS IS WATCHING

After almost 10 years of Congressional and Internal Revenue Service scrutiny, the rules for deducting car-use costs have gotten muddier, not simpler. But one point remains clear. The IRS is very interested in your auto deductions. No fewer than 9 of the 14 questions on the new, simplified schedule C-EZ refer to car and truck expenses. Other business-income tax forms request even more information about auto deductions.

"The IRS has put a lot more scrutiny on the business use of automobiles," says Michael Nelson, a senior manager with McGladrey & Pullen, a Minneapolis accounting firm. "They ask everything."

As a result, many small-business owners have given up on auto deductions they could legitimately take. "We've seen a lot of deductions disappear," notes Nelson.

That's a shame, because the legitimate business use of a car can generate significant deductions for small-business owners. And you can find yourself using your car more often with a home-based business than you would if you worked in an outside office. Commuting is not deductible, but other business errands are. So every client meeting or post office run is a legitimate business-mileage expense.

Here's a brief review of how to make the most of your business auto deduction.

KEEP A MILEAGE LOG

While it's no longer mandatory, keeping a mileage log in your car to demonstrate your business use is still a smart idea. "If you don't keep a log, and you get audited, you don't have a strong position to negotiate from," says Nelson, who admits that many of his clients don't keep logs. "Then we have to reconstruct their mileage for a year."

A reconstructed defense consists of going through appointment books, maps, canceled checks, and the like to prove how many business miles you drove in a two-month period and then multiplying by six to get the legitimate annual mileage. And, says Nelson, the IRS won't always give you credit for all the mileage you come up with.

To keep a log, simply carry a small notebook or clipboard in your car. Whenever you go on any business outing, record the starting and ending mileage, the total miles driven, and the business purpose of the trip. Record your odometer mileage on January 1 and December 31, if you run your business on a calendar year. Keeping all those little notes is a pain in the neck, but it's also the cleanest way to record miles.

EITHER TAKE THE MILEAGE DEDUCTION...

The most straightforward, easiest way to deduct business use of a car is to take a mileage allowance. For tax year 1992, the IRS allows an income tax deduction of 28 cents for every business mile you drive. It can't get any simpler: Add up all the miles in your log, multiply by 0.28, and that's your mileage deduction.

There are a few conditions under which you can't take mileage allowance and must instead figure actual expenses for your automobile deduction. You can't take mileage if you lease the car, or if more than one car is used in your business at the same time.

If you take a mileage allowance for gas and depreciation, you may still deduct tolls, parking fees, and similar external costs of driving. And you can deduct the business portion of the interest you pay on your car loan as well as the business portion of sales taxes you pay on a new car.

OR DEDUCT ACTUAL EXPENSES

Despite the mileage allowance's ease of calculation, you can often take a larger deduction by figuring actual auto expenses instead. Actual expenses--which include the cost of the car and everything you spend on it--tend to come out higher unless you have a car that's very inexpensive to run, according to Tampa, Florida, CPA Douglas Perreault.