Taxpayer asks: I read your advice about deductions for business expenses but I don’t use a home office or some of the other things you mentioned. I do, however, use a car for much of my work. Can I deduct that?
Taxgirl says: If you use your car exclusively in your business, you can deduct car expenses. You just need to figure out how much.
If you use your car for business and personal use, you must pro rate the expenses based on actual mileage. You can deduct car expenses, including depreciation or lease payments, gas and oil, tires, repairs, tune-ups, insurance, and registration fees in proportion to your business use. So, let’s say you drove 50,000 miles this year, 30,000 miles of which were for business. That’s 60% of your total miles for business. So, add up the expenses attributable to your car and 60% of those expenses may be properly deducted on your return.
Alternatively, you may be able to use the standard mileage rate to figure your deduction (for tax year 2007, it’s a whopping 48.5 cents per mile).
Even better, if you are self-employed, you can deduct the business part of interest on your car loan, state and local personal property tax on the car, parking fees, and tolls, even if you claim the standard mileage rate. For more info on car expenses, check out IRS Publication 463.
Like any good lawyer, I need to add a disclaimer:
Unfortunately, it is impossible to give comprehensive tax advice over the internet, no matter how well researched or written. Before relying on any information given on this site, contact a tax professional to discuss your particular situation.
In addition to the obvious (gas savings), buying a fuel-efficient car can put more money back into your pocket. Congress has finally gotten its act together and is offering tax breaks for certain vehicles for 2006.
Beginning in January 2006, those who purchase eligible vehicles will receive a tax credit, as opposed to a tax deduction. The main distinction between a credit and a deduction is that the credit is subtracted from the tentative tax due to IRS, as opposed to a mere reduction in gross income.
The IRS has not yet released the actual dollar figures for the credits, but American Council for an Energy Efficient Economy has made estimates based on its understanding of three factors:
1. Fuel economy and improved gas efficiency compared to a 2002 model;
2. Estimated savings of at least 1,200 gallons of fuel over the vehicle’s lifetime;
and
3. Emission standards approval (this is why no diesels will qualify for the credit).
Vehicles which should qualify for the credit include Toyota Prius, Honda Civic GX (sold only in California), Ford Escape Hybrid, Chevrolet Silverado Hybrid and Honda Insight (automatic version only).
Don’t assume that you can just make lemonade.
The IRS announced today (well, today is technically Dec. 20, 2005 and the PR is dated Dec. 22, 2005, so think what you will) that they will not recognize certain deductions related to the sale/auction of used vehicles. Here’s the PR in its entirety:
IRS Warns of Questionable Deductions for Donated Vehicles
IR-2005-145, Dec. 22, 2005
WASHINGTON — Internal Revenue Service officials announced today that the IRS will not recognize certain deductions that taxpayers may be claiming relating to donated vehicles sold at auction.
IRS officials took this step after becoming aware of questionable practices that have surfaced recently. Some charities have sold donated vehicles at auction and claimed that the sales are to needy individuals at prices significantly below fair market value. By doing so, these charities have claimed that the sales trigger an exception to the general rule that the deduction allowed to the donor is limited to the proceeds from the charity’s sale.
The IRS’ position is that vehicles sold at auction are not sold at prices significantly below fair market value. Therefore, the IRS will not treat vehicles sold at auction as qualifying for the exception for sales to needy individuals at prices below fair market value.
If a charity sells a donated vehicle at auction, the IRS will not accept as substantiation an acknowledgment from the charity stating that the vehicle is to be transferred to a needy individual for significantly below fair market value (Box 5b on IRS Form 1098-C). In such cases, the donor may claim a deduction of more than $500 only to the extent that the gross proceeds from the sale exceed that amount and the donor substantiates the contribution with an acknowledgment from the charity that indicates the gross proceeds from the sale (Box 4c on IRS Form 1098-C).
The rules for determining the amount that a donor may deduct for a charitable contribution of a qualified vehicle, including an automobile, with a claimed value of more than $500 changed at the beginning of 2005 as a result of the American Jobs Creation Act of 2004. In general, that Act limits a donor’s deduction to the amount of the gross proceeds from the charity’s sale of the vehicle.
Under an exception to this general rule, a donor may be eligible to claim a fair market value deduction if the vehicle is sold at a price significantly below fair market value to a needy individual, in direct furtherance of a charitable purpose of the recipient organization of relieving the poor and distressed or the underprivileged who are in need of a means of transportation. In this case, the charity provides to the donor an acknowledgment indicating that the donor may claim a fair market value deduction for the vehicle.
Because this exception does not apply to sales at auction, a charity may be subject to penalties under sections 6701 and 6720 of the Internal Revenue Code if the charity sells a donated vehicle at auction and provides to the donor an acknowledgment that indicates anything other than the deduction may not exceed the gross proceeds from the sale.
