Tax Deductions
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Deductions the IRS allows you to take on your car
Article by Sondra P. Gaylord, Enrolled Agent

The tax rules since 2003 are divided into four sections on this page:

Business | Charity | Medical | Moving Expenses

A four sentence pre-2003 tax history lesson:

From the 1960s through the 1980s, Americans enjoyed the IRS as a mostly-willing partner in keeping that money at home. By deducting the family vehicle as "business use", a teacher, a building contractor, or a realtor could write off either so-much-per-mile or add up all the actual expenses plus depreciation. It made for a hefty deduction against income. This all began to change with Reagan's sweeping Tax Reform Act Of 1986.

Business

Q. Define Commuting

Commuting is the travel you do to and from your first and most important place of business. Commuting is never deductible. An employee who uses his/her car in the course of business (an itinerant teacher, a salesperson, a minister), gets less of an actual deduction than someone who is self-employed. (See Revenue Ruling 99-7).

Let's look more closely at the teacher, for instance. Perhaps h/she teaches the Gifted and is responsible for visiting four schools a day. The trip to the first school and home from the last school is commuting and not deductible. However, all the mileage between schools is deductible. Further, if she chooses, on her own time, to go to the grocery and pick up treats for the children, to attend college classes to upgrade her education and skills, to go to the library, or to go to an office supply store, all of that mileage is also deductible. Because h/she is an employee, the employer should sign off on use of that personal car in the teaching day.

A self-employed person who can support a business-in-home has a greater advantage when it comes to deducting miles. Let's look at the instance of a man who has a day job and is an Internet Salesperson from his home in the evenings and on the weekends. He keeps good records, uses that space exclusively for his Internet business, advertises, keeps a separate bank account, etc. It clearly is a business activity. He has no other office for that business. On weekends, he peruses the garage sales and resale stores for items to sell on the Internet. When he makes a sale, he boxes items and takes them to the Post Office. He maintains a PO Box and visits it daily because of his Internet Business. Every mile he travels from home because of that business is deductible on his business return.

Additionally, employee business expense is only deductible:

  1. if the person can itemize at all, and
  2. the first 2 1/2% (of AGI) that mileage is lost...because of the peculiarity of the tax code.

Q. Define AGI

Adjusted gross income, a very important number in tax preparation. On the 1040, it is the number right at the bottom on the right and the first number on the back of the 1040. A number of things are regulated by adjusted gross income (AGI). Many states take that number as their starting point. So one wants it as low as possible. When you hear the words "off the front" that's exactly what it means. It lowers AGI, and therefore both federal and state taxes in many states.

Additionally, several things are closely related to the AGI: medical expenses: the first 7 1/2% of AGI is literally lost or "adjusted out" or deducted from total medical. The first 2 1/2% of AGI is deducted from a combination of employee business expense (see teacher above), tax preparation fees, brokerage fees, PO box not for business, etc. If there is a casualty loss, such as a fire to the personal residence, 10% of the AGI is immediately dropped from that loss. And then, the deduction on the back of the 1040 is the greater of your standard deduction or itemizing. Itemizing (schedule a) lists all deductions for: medical, state-local-property taxes, home mortgage interest, charitable giving, and that 2 1/2% "misc." category that includes that poor teacher's miles.

Record-keeping

The IRS adores good records. Excellent records will be your best friend if you need to defend your numbers. Whether you're self-employed or an employee, every car used in business requires a log for each year. The log should show:

bulletthe odometer reading on January 1 and December 31.
bulletin between, business miles should be noted on the date they occur.
bulletat the end of the month or the year: add them up! Unless you park your car at your place of business, it can never be 100% business use.
Beware: a trip to IRS to defend that car is considered personal use.

Now you'll have 2 numbers: business miles/total miles This creates a fraction Now, you have a choice:

  1. you can deduct your business miles at 36 cents a mile for 2003 or
  2. you can take that fraction times all your vehicle expenses plus depreciation (don't forget the interest you're paying to buy the car!). You have this choice whether you're buying or leasing. Whichever, you must generate that fraction.

Q. Define depreciation

Depreciation is the act of matching a business item to its years of use. The IRS tells you how long you'll use it. In many instances, taxpayers can "write off" or "expense" a new item, such as a computer in the year of purchase under code section 179. Once you do that, disposing of it before the IRS tables say you should dispose of it will result in recaptured income which will be immediately taxable. Also, many states do not honor accelerated depreciation. The taxpayer must depreciate large equipment (often described as costing more than $100 and lasting longer than a year).

Further, start-up costs (atty,accountant, training staff) spent before the business is actually open for clients and customers, those start-up costs must be depreciated. This is an area where many taxpayers will want to lean on professional advice. There are, for 2002 and 2003 massive depreciation deductions possible for new vehicles.

 Caution: Many states will not permit those deductions in full. Want more information? Call IRS at 1-800-829-FORM for Publication 463

Charity

You may never deduct your time spent on a charitable activity but you may deduct $.14 cents a mile for every trip your car goes for the purpose of advancing a charity. That's from home to help build a house for Habitat for Humanity, for work on a church Board, or to spend Christmas Day helping out in a hospital. It also includes the trip to the grocery to buy ingredients for the cookies you donate along with Toys-for-Tots. It includes the miles to the Post Office to get postage to all you to write thank-you notes on behalf of Hospice or the Animal Welfare League. The charity must be recognized by the IRS. There are a vast number of approved charities listed in IRS.gov.

Gifting to another person directly, no matter how needy, is not deductible. (See IRS Publication 526 and 561) Remember what we just said above, the charity must be official. For example, I visit my friend's Aunt in the hospital or my favorite charity can't get non-profit status...do they count too? No.

Medical

You may deduct $.14 cents a mile in 2003 as a medical expense (over 7.5% AGI) for every mile you go for medical purposes for yourself or a loved one. (ie., a child is in the Cleveland, Ohio Clinic and you live in Youngstown, Ohio). See IRS Publication 502. You may deduct the miles you travel to visit and train and bring home your seeing-eye dog. Did you get hearing aid batteries? Keep track of the miles.

Moving

If you are moving for business purposes, you may deduct every mile, door to door , at $.14 cents per mile for year 2003. See IRS Publication 521. Remember that a log is essential to get all these goodies.

Just 15 business miles per day for 300 days a year is a deduction of $1,620.00 at .36 cents per mile.

In summary, ever since Mr. Toad  (Wind in the Willows by Kenneth Grahame) set bedazzled eyes on a horseless carriage chug-chug-chugging by, people have been using these marvelous machines to make money.  What is wind in the willows Keith Graham? It's a book written at the very end of the 19th or beginning of the 20th century. It's about Mr. Toad and his friends. Mr. Toad adores every new invention that comes down the pike and went absolutely buggy over the horseless carriage. Wind in the Willows: Kenneth Grahame.

Sondra Gaylord (my Mom) is an Enrolled Agent in Youngstown Ohio who often uses dog illustrations to explain complex taxation concepts. To learn more about her practice see: http://www.planningforlife.info/sondra.htm

To see more of her illustrations:

bullet http://www.altogether.com/sondra/
bullet http://www.altogether.com/sondra/taxfaxrelax.htm
bulletSome of these wonderful, original drawings are on mugs,  tee shirts, mouse pads etc., available here.

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