How a Small Business Drives The IRS Crazy

Looking to increase your business deductions? Look no further than your car. The general rule is: Your vehicle is deductible to the extent you use it for business.

If you drive your car 100% of the time for your business, all car-related expenses are deductible. If you use it less than 100% for business, which is very typical for a small business and the self-employed -- you'll still come out ahead by keeping good records. For example, if you drive your car 75% for business, then you get to deduct 75% of your vehicle expenses.

There are two methods for reporting your car expenses:

1. Actual Expense Method

With the Actual Expense Method, you keep track of all your vehicle related expenses, such as:

-- gasoline
-- oil, filters, belts, tires
-- maintenance & repairs
-- insurance
-- license & registration
-- wash & wax
-- supplies & equipment (including an emergency kit)
-- depreciation expense
-- lease payments
-- loan interest
-- state and local taxes

Add up all those deductions and multiply the total by your business use percentage, which is determined by dividing business miles driven by total miles driven.

2. Mileage Method

It works like this: instead of tracking all the actual expenses listed above, you only need the number of business miles driven, which is multiplied by the standard mileage rate published each year by the IRS. (Check IRS rules for current allowable deductions.) Interest and taxes are also deductible under the Mileage Method.

Even the Mileage Method requires some record keeping, however. You should keep a log that documents the business use of the vehicle. 3 IRS-approved car logs:

1. Daily Log. You record all business miles for 365 days of the year.

2. 90-Day Log. A little-known rule -- instead of keeping mileage records for the entire year, you use a representative portion of the year -- and a 90-day period is considered an adequate representation of the entire year.

3. One-week Log. A short-cut: The IRS also allows you to keep a log for just the first week of each month. Then you multiply that week's mileage by 4 to get the monthly total.

Which method is better?

If you want to get the highest deduction, "run the numbers" under both methods and then use whichever method results in the highest deduction. You are allowed to pick whichever method you want.

Once you pick a method, be careful to follow the rules on "switching" from one method to the other: You can switch from the Mileage Method to the Actual Method, but generally are not allowed to switch from the Actual Method to the Mileage Method.

Having said that, let's be practical. If you hate record keeping, use the Mileage Method. It's simpler and faster. You won't have to keep all the receipts.

The more detailed record keeping method of course drives the IRS really crazy. Regardless of which method you use, it's a goldmine of deductions.

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