Small Business Car-Related Deductions

You may not be aware of tax deductions for small business car expenses. Even if you use your car for personal as well as business-related purposes, you can still deduct some expenses from your year-end taxes. The key to getting these deductions, though, is carefully monitoring your car use to ensure you have documentation on all of your expected deductions. Since there are several gray areas, your documentation will be essential in capitalizing on maximum deductions.

Mileage Deductions

The most basic deduction you will be able to obtain is a mileage deduction. You will be able to claim the expenses you spend on gas and wear-and-tear to your car or those cars owned by your small business as business-related expenses if they occur in the course of doing business. Like all business expenses, these are not straight deductions. Instead, they are deducted from your taxable income on a yearly basis. For example, an independent contractor working as a tutor could earn $700 a week. If that contractor travels to the client's homes, he or she may spend $50 a week on gas and wear and tear to a vehicle. If the person pays 25 percent of income to taxes, then the initial income after tax would be $525. However, with the mileage deduction, the income before tax would be reduced to $650, and income after taxes could be increased to $537.50. This represents a savings of about $600 a year in taxes.

Car Insurance Deductions

While many small business owners or independent contractors realize mileage can be deducted, they may miss insurance deductions. You can deduct some of your insurance payments if you use your home, automobile or other assets for your business. The key is determining what portion of your insurance is deductible, and this can be challenging. You can deduct a percentage equal to the percentage you use your car for business. For example, if you use your car for personal errands 50 percent of the time and business errands 50 percent of the time, then 50 percent of your insurance is deductible. Determining this portion is the tricky part. You will need to track the time spent in your vehicle for both purposes in order to get an accurate percentage. Merely estimating a percentage will not be sufficient if you get audited for the deduction.

Documenting Use

You should start by documenting all the trips you make in your car, both business and personal, for at least three months. After this period of time, you can stop documenting personal trips. You will know the percentage of time you spend in your car for business on average. However, you will need to continue to document business-related trips. You need to track the date, time and distance of your trip. This will be used to determine your mileage deduction at the end of the year. As a small business owner, you will need to have employees do the same if they are using company cars for errands. This can be burdensome, but the burden is reduced if it is made a routine habit.