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Steer Clear of Trouble

Digital Library > Acquiring and Managing Finances > Business expenses “Steer Clear of Trouble”

The Internal Revenue Service authorizes two methods for figuring deductions: actual expenses or a standard mileage rate.

Businesses that select the "actual expenses" method can deduct gasoline, oil, tires, repairs, license tags, registration fees, insurance, garage rent, leasing charges and depreciation. However, not all operating costs count. For example, there’s no deduction for interest charges on auto loans for employees, though they are allowed when someone is self-employed.

Caution: The IRS restricts depreciation deductions when an auto is used less than 50% of the time for business. It also limits deductions when an auto is used for both business and personal driving. In that case, total costs must be split, with deductions limited to the percentage of costs linked to business use.

Instead of claiming actual expenditures, your business might qualify to use a standard mileage rate, which simplifies paperwork. The standard rate, which encompasses depreciation as well as other auto expenses, is 34.5 cents a mile for 2001, up from 32.5 cents a mile for 2000.

Caution: The IRS restricts use of the standard mileage rate to the first year that your business places the auto in service. In later years, you have the option to use the standard rate or actual expenses. But if you don’t choose the standard rate in the first year, you cannot use it for that auto in any year.

Tip: Whether you claim actual expenses or use the mileage allowance, remember to deduct parking fees, as well as bridge, tunnel and turnpike tolls incurred while driving for business.

Writer: Julian Block, Larchmont, N.Y., is an attorney and former IRS investigator who has been cited by The New York Times as "a leading tax professional" and by The Wall Street Journal as an "accomplished writer on taxes."

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