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

Home Office Computing, Jan, 1993 by Linda Stern

Deducting actual expenses is much more complicated than taking the allowance. You have to maintain painstaking records of all the money you spend on your car--gasoline, tires, insurance, tune-ups, and the like. This can be made easier if you pay for all car-related expenses with a separate business credit card or checking account.

And you have to learn how to depreciate your car, using a complicated series of calculations we'll get to in a minute.

When you deduct actual expenses, the amount you may deduct is prorated on the basis of your business use of the vehicle. Use a car 60 percent for your business and 40 percent for yourself, based on mileage, and you may deduct 60 percent of your actual expenses.

The more business mileage you have, the less valuable certain fixed costs become. Whether you travel a little or a lot, your depreciation and insurance won't change. Say, for example, that your prorated business share of your insurance is $700--at 28 cents a mile, it would take 2,500 miles of business driving to best that.

If you're willing to keep all the records and do all the math, you might want to figure your deductions both ways and decide which way to go. But choose carefully: It's twice as complicated and costly (and in some cases illegal) to switch methods once you've started using one.

DEPRECIATION AND THE LUXURY LIMIT

As you might expect, the key to the biggest auto deductions is the actual money you spend to buy the car. Tax laws allow you to write off the car's value over time, as wear and tear makes it worth less. In some cases, you're allowed to accelerate depreciation--write off the car more quickly than its value actually declines. In other cases, you can only take a straight-line method of depreciation--in which you divide your basis in the car (roughly, the amount you paid for it) by the number of years in its useful life and deduct that amount every year for the life of the car.

Sometimes you'll find it worth taking a Section 179 deduction, a move that allows businesses to take the full cost of their equipment (up to $10,000) as a deduction in the year that it is bought and first used in business. (For more on the Section 179 deduction, see last month's column.)

Any of these methods, including the Section 179 write-off, is constrained by the luxury-car cap, which limits eligible auto-depreciation deductions. This provision was originally written by Congress to eliminate taxpayer underwriting of luxury automobiles, but as auto prices have gone up, the IRS's concept of luxury has gone down.

Assuming that you use your car 100 percent for your business and choose to depreciate it, you can never take more in a year than the following preset amounts. With cars bought in 1992--even if you are using the Section 179 deduction or an accelerated depreciation method--you can't deduct more than $2,760 for this first year of use. For 1993, the second year in which you use the car, you can deduct a maximum of $4,400. For 1994, you'll be able to deduct $2,650; and in every year thereafter until the car is fully depreciated, you'll be able to take $1,575.