Dear Driving for Dollars,
I run my own small business and have been taking the standard mileage rate deduction on my taxes for a while. I was recently at a seminar where another participant mentioned that he was able to maximize his tax deduction by using his two household cars instead of just one. How could this be?
What you overheard is certainly possible, but it depends on how the tax deduction is calculated.
There are two methods for deducting auto expenses on your business taxes. The first, the one you have been using, is called the mileage cost basis, using the standard mileage rate, which for 2014 is 56 cents per business mile driven. With this method, you are simply multiplying 56 cents by the number of business miles you drive. It doesn’t matter what car or cars you are driving, since you can drive only one car at a time and the rate is the same regardless of the car.
The second method for calculating your tax deduction is called the mileage percentage basis. With this method, you are keeping receipts for all of your car expenses (fuel, insurance, repairs, maintenance), as well as the number of miles you drove that year for business and personal use. You use the mileage log to calculate a percentage of use of the car for business and then use that percentage to calculate the deductible amount of your total expenses.
According to Jeff Schnepper, author of the 2014 edition of “How to Pay Zero Taxes,” using the mileage percentage basis can work to your advantage if you have two cars for business use and you alternate between them for a tax deduction. “If you are driving 36,000 business miles in one car and 12,000 personal miles in another car, you would be driving a total of 48,000 miles annually. By rotating your cars equally between business and family, say every six months, each car will be driving 24,000 miles per year and 75 percent of those miles will be business miles — 36 divided by 48 equals 0.75, or 75 percent. That’s 75 percent of the expenses of both cars, which can be a lot more than deducting all of the costs on one car and none on the other.”
If you are considering doing this, do the math for your situation based on last year’s mileage and car expenses and see if it works in your favor. While there is nothing wrong with using whatever accepted method works best for you, it’s always best to consult a tax professional to be sure you fully understand the IRS regulations and how they apply to your situation.
If you are ready to hire a tax pro, read “How to choose a tax preparer” for tips and questions to ask before you work with someone new.
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