Curbing taxes on business cars - car expense write-offs; excerpt from "Price Waterhouse Personal Tax Advisor 1989-1990"

Curbing Taxes On Business Cars

These tips will help you make the most of tax write-offs for the car you use in business.

The company car has been around longer than the Internal Revenue Code. So you would think that by now the rules governing write-offs for business cars would be clear-cut and easy to understand. Well, think again. While the rules for writing off business automobiles are complicated, awareness of some factors should see you through them.

Here is what you need to know.

Keeping Records

Uncle Sam says that you must substantiate the business use of your car, and that means you must maintain adequate records. You are not off the hook if you use a car owned by your employer, either. These record-keeping rules apply regardless of whether you own the car or it is provided to you by your company. The best way: Keep a log handy to record your business miles, your destination, and the business purpose of your trip.

These records are not just for show. When you or your employer files annual tax returns, the IRS wants proof of your automobile expenses and usage.

It wants to see the number of miles you logged for business. It wants to know the total number of miles you drove. And if you are driving a company car, the IRS wants to know if your employer allows you to use the automobile to commute.

Finally--and most important--the IRS wants to know if you have support for your deduction. If the answer is yes, you are better off if your evidence is written.

Business Driving Defined

When it comes time to write off automobile expenses, here is the first question you must ask yourself:

"What percentage of my car's use may I attribute to business?"

The IRS defines business use as the miles you drive your car between two business locations--your office, say, and the office of a customer.

Commuting is never business use. It makes no difference what type of work you do, how far you travel to your office, or what crisis you are about to face.

A trip to work is personal and not deductible. And making a business phone call or holding a business meeting in your car while you drive will not change that fact.

Furthermore, commuting--in the eyes of the government--involves more than driving your car to and from your home to your place of business.

For an employee, the IRS defines commuting as the first trip in the morning and the last trip home. So if you drive from your home to a customer's office, you are--in the eyes of the IRS--commuting. And you are not entitled to classify the trip as business.

Tip: The law carves out an exception to the commuting rule for people who are self-employed and do business from a bona fide home office. These taxpayers may claim--as business mileage--trips to and from home.

Let's say you are a physician in private practice in Chicago, and you maintain an office on the first floor of your town house. You see patients in your office, but once a day you drive 12 miles to a local hospital to make your rounds. Under the rules, you may claim as business mileage the 12 miles to the hospital--and the 12 miles back--even though you are driving to and from your home. The reason is, your home is also your office.

Business Use Of A Personal Car

When you deduct car expenses, you have two choices: You may claim a flat amount for each business mile you drive--known as the standard rate--or you may write off the actual costs of operating your automobile. Here is how the two methods work.

Using the standard rate. The standard mileage rate for 1989 equals 25.5 cents a mile for the first 15,000 miles of business travel in a year and 11 cents a mile for mileage that tops 15,000. [For 1990, the standard mileage rate is 26 cents a mile for all business travel, not just the first 15,000 miles.]

There is one catch, though: For 1989, you may not use the standard 25.5-cents-a-mile deduction on cars that you have fully depreciated--that is, cars you have driven for more than 60,000 business miles.

For these automobiles, you may claim only 11 cents a mile.

Caution: Sometimes you are not allowed to use the standard mileage rate and must write off actual expenses. The two instances: when you lease your car and when you have claimed accelerated depreciation on your car in a previous year.

Actual Expenses. In most cases, your actual expenses will exceed the standard mileage deduction. So you should opt to write off actual costs.

A portion of all of the following expenses is deductible (the percentage you write off equals the percentage of your car's mileage that you attribute to business):

* Automobile-club memberships.

* Batteries.

* Driver's license.

* Gasoline and oil.

* Insurance.

* Lubrication and repairs.

* Registration and other licensing

fees.

* Supplies, such as antifreeze.

* Temporary rentals.

* Washing and waxing.

You also may write off tires with a life of less than one year. (You should depreciate tires that last longer and are purchased separately from the car.)

But you may not deduct on your personal return the cost of parking your car at or near your office. However, if your company provides you with parking, the value of this fringe benefit is not taxable to you. So your employer does not report it as income on your Form W-2.

Nor may you fully deduct interest on a car loan if you are an employee--even if you buy the car strictly for business. This interest is considered personal interest, which, thanks to tax reform, is only 20-percent deductible in 1989 and 10-percent deductible in 1990. After 1990, personal interest is not deductible at all.

You also may depreciate your car in the same way you depreciate other personal property you use for business. If you are buying a car that will be used for business, you calculate your depreciation deduction based on the total purchase price of your car.

If you are converting your family car into a business automobile, then you base depreciation deductions on the lower of the fair market value at the date you convert or its purchase price. In either case, you must multiply the depreciation amount times the percentage of your actual business use. But note that a special cap applies to cars.

The law limits deprecation deductions for business cars purchased after Dec. 31, 1986, and before Jan. 1, 1989, to $2,560 in the first year, $4,100 in the second year, $2,450 in the third year, and $1,475 in all remaining years. For cars bought after Dec. 31, 1988, the depreciation limits are $2,660 in the first year, $4,200 in the second year, $2,550 in the third year, and $1,475 in all remaining years.

Here is an example. On Jan. 15, 1988, you purchased an automobile for $19,000. You start driving it--or, in IRS lingo, "place it in service"--that same day. In 1988 and 1989 you use the car for business 70 percent of the time. So your depreciation deductions for 1988 and 1989 are $1,792 (the $2,560 limitation times your 70-percent business use) and $2,870 (the $4,100 limitation times 70 percent).

Another wrinkle: If business use of your car falls below 50 percent, you must go back to the first year you depreciated the car and recompute your depreciation using the straight-line method. The difference is picked up in your current return as income.

You are not permitted to use the more favorable accelerated depreciation. And the limits on these deductions apply regardless of which depreciation method you use.

Also, the sales tax you pay is not currently deductible. You may, however, add this cost to the purchase price of your car when it comes time to calculate your depreciation deduction.

Caution: If you take the standard mileage deduction in year 1, then write off actual costs in year 2, you must depreciate the car using the straight-line method--that is, you write off the same amount each year.

But if you deduct your actual costs from the start, you may depreciate your car using the accelerated method--that is, you write off more in the early years of ownership.

Tip: Whether you write off your actual automobile expenses or claim the standard mileage rate, you may still deduct parking fees and tools you pay when you travel for business. But you may not write off fines for violating traffic and parking laws.

Special Rules For Leasing

When Congress voted to cap depreciation deductions for business automobiles, it also imposed tough new restrictions on cars that you lease. And these rules apply whether you are an employer or employee.

The law still allows you to deduct that portion of your lease payment that is attributable to business.

For example, if you use your leased car 90 percent for business, you may write off 90 percent of your payment.

But here is the rub. The law wants to put people who lease business automobiles on an equal footing, tax-wise, with those who purchase their business autos outright. So if you lease, the law requires you to add to your taxable income or reduce your deduction. You determine the amount each year by using tables and formulas provided by the IRS. The lower a car's business use, the smaller the adjustment.

You do the second calculation only if your car was leased before Dec. 31, 1986. Even then, you do the calculation only once in your car's lifetime--when your business use falls below 50 percent.

Questions And Answers

Business use of my car added up to 70 percent last year. But this year my business use will fall to about 45 percent. Are there any tax consequences? Unfortunately, if your business use falls below 50 percent, you have to "recapture" some of the depreciation deductions you claimed in the previous year.

Say you purchased a car in 1989 for $19,000, and you depreciated the car using the accelerated method, which allows you to claim larger write-offs in the early years of ownership. In 1990, however, your business use falls to 45 percent. The law says you must redepreciate the car using the straight-line method. With the straight-line method, you claim the same amount of depreciation each year you own the car.

This change in depreciation methods results in a lowering of your depreciation deduction for last year. So you must add to your taxable income in the current year the difference between your deductions under the straight-line and accelerated methods.

If I use the actual-cost method, what is the best way to keep the data in one place? Many people jot down mileage in a small pocket notebook, then attach expense receipts to the pages with paper clips. You may also purchase a mileage log. Most mileage logs include a place to list these expenses so that you can find them easily when you summarize your tax data.

COPYRIGHT 1990 U.S. Chamber of Commerce
COPYRIGHT 2004 Gale Group