Easy Street

A new IRS regulation makes it a snap to calculate and report company vehicle deductions on your next tax return.
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This story appears in the March 2004 issue of Entrepreneur. Subscribe »

There's good news from the irs for entrepreneurs who use four or fewer vehicles at the same time for business purposes. A new IRS regulation now allows you to use the standard mileage rate when calculating a tax deduction for those vehicles.

To use this method, calculate the fixed and operating costs of the vehicle by multiplying the number of business miles traveled during the year by the standard mileage rate. The IRS has increased the standard mileage rate to 37.5 cents per mile for 2004, up from 36 cents in 2003.

In the past, business owners using more than one car were not able to use the standard mileage rate, but instead had to track actual vehicle expenses-a more complicated and burdensome procedure. In addition, when you use the standard mileage rate, a specific amount is included for depreciation, so you can't claim an additional deduction for depreciation.

With actual vehicle expenses, business owners have to keep records for all car expenses during the year, including gas and oil, cleaning, repairs and maintenance, insurance, interest on a vehicle loan, tires and supplies, parking and garage rental, tolls, auto club membership, personal property taxes, depreciation if the vehicle is owned and lease payments if it is leased.

Jennifer Jones, a CPA in Fairfax, Virginia, who also advises entrepreneurial companies, says the new regulation will mainly benefit new small businesses that use only a few vehicles. That's because of the rules regarding depreciation expenses. Specifically, if the business is already depreciating the vehicle under the Modified Accelerated Cost Recovery System, or has taken a Section 179 deduction, it is not eligible to use the standard mileage rate, Jones explains.

"As a result, existing businesses with more than one vehicle may find it impractical to convert from using actual expenses for vehicles already owned to using the standard mileage rate on new vehicles," Jones adds.

Even so, the IRS says that as a result of this change, over 800,000 businesses will become eligible to use this method, and that the expansion of the standard rate will save small businesses 8 million to 10 million hours per year in record-keeping requirements. Commenting on the change, IRS Commissioner Mark W. Everson says, "This [change] reflects our ongoing interest in reducing the burden for businesses to comply with the tax laws."

Great Falls, Virginia, writer Joan Szabo has reported on tax issues for 17 years.

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