Finance Tax Time

Is your business missing out on valuable tax deductions you can take for the use of your personal vehicle for business purposes?If you haven’t done so already, you should definitely beat a path to the door of your local office supply store and pick up a notebook for logging the mileage you drive to conduct businessand be sure to log the miles you drove to buy it!

Not taking the trouble to do this is like letting your pricey gasoline flow onto the pavement instead of into your tank!

Even if you work at home most of the time, miles you’ve driven to purchase office supplies, buy stamps or mail packages, and other errands for your business can translate into big tax deductions. With fuel costs soaring, you are literally throwing money down the drain if you are not keeping track of this mileage and taking the deductions for it to which you’re entitled as a business owner. And the first entry you need to make is the beginning mileage on the odometer as of January. You’ll also want to make sure that you keep track of all your automobile expenses associated with that personal vehicle that you’re using for business. (See why below…)

The dramatic surge in fuel costs has not been lost on the IRS. Of course, gasoline prices began to edge up shortly after the beginning of the war in Iraq; but the devastation wrought by Hurricane Katrina prompted the IRS to offer a valuable money-saving solution for business owners. (If you live outside the U.S.A. you should check your tax authority’s website for similar provisions.)

Last year,for 2005, the IRS increased the standard mileage rate for the use of a vehicle (car, van, or truck) by 3 cents a mile, to 40.5 cents a mile for all business miles driven. However, in the wake of Katrina, that rate was increased further to 48.5 cents a mile for the business miles driven in the months of September, October, November, and December, 2005.

This increased mileage rate ended with the end of 2005. The new mileage rate for 2006, effective January 1, is now 44.5 cents per business mile driven. You can maximize this deduction if you’re careful to consolidate business and personal errands. For example, I wait until I need to go to the post office to ship a package for my business to stop to at the drug store and supermarket right next door to pick up groceries. What would have been “dead” mileage becomes a deductible business trip, as long as you’ve logged your business purpose in your mileage logbook.

In addition, for both 2005 and 2006, the IRS also encouraged
Katrina-related charitable relief activities by granting
higher rates for miles deductible and miles reimbursable driven for such activities.

Of course, the use of these mileage allowances can be rather complicated. For example, you cannot take additional
deductions for business use of an automobile to which you
have already applied the Modified Accelerated Cost Recovery
System (MACRS), after claiming a Section 179 deduction for
that vehicle that your business purchased directly.

And if you’re using a personal vehicle for your business,
don’t forget to calculate the percentage of total miles for
the year that you travel for business purposes. At the end of 2006, you’ll note the year-end odometer reading in your mileage logbook and subtract from it the odometer reading that you recorded this month. Then you’ll add up all miles driven for your business that you have recorded and divide it by that total mileage to calculate the percentage of total miles you used for your business. If it turns out that 30% of your total mileage on that personal vehicle was for business purposes, you can deduct 30% of *all* your expenses for maintaining that vehicle: not only fuel, but all trips to the garage for routine maintenance or special repairs as part of your business expenses for the year.

The devil is in the details, as always, of course. You will want to consult your tax accountant on how best to apply the rules to your situation. If you prepare your tax returns yourself, you can get the details directly from the IRS website:

http://www.irs.gov/pub/irs-drop/rp-04-64.pdf. Examine the fine print closely: You’ll find that there are limits on what percentage of business use can be claimed for a personal vehicle, no matter what your actual numbers might be; so if your actual business mileage is greater than 75 per cent of your total mileage, you might be better off purchasing a separate vehicle dedicated to business use. If you’ve taken the care to structure your business correctly–using a corporation, limited liability company, or other stand alone entity–you and your business will benefit from even greater deductions.

(C) Copyright 2006 Azur Pacific Associates.
All formats and media, known and unknown.
All Rights Reserved.

Germaine A. Hoston, Ph.D. is a political economist, consultant and President of Azur Pacific Associates. She specializes in helping small business owners (those with fewer than 500 employees) maximize their bottom line by using business entities as alternatives to the popular but risky single proprietor/general partnership to minimize taxes and protect
personal and business assets. She is Editor of Azur
Pacific Associates’ free monthly WealthStrategies 202.com eNewsletter http://www.wealthstrategies202.comand an authorized reseller of the Secret Millionaire Asset Protection System http://www.wealthstrategies202.com/secretmillionairenopopup.html

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A taxpayer may usually deduct 14 cents per mile for all miles driven on behalf of a charity (Section 170(i)). The primary purpose of the travel must be to contribute to the mission of the charity. In addition, the travel must not provide the taxpayer with any significant amount of personal pleasure, recreation, or vacation (Section 170(j)). Further, a taxpayer may not deduct the miles driven on behalf of a charity, other than a church, if the purpose of the travel is to influence legislation (Section 170(f)(6)).

For example, if a taxpayer drove her personal automobile a total of 500 miles to procure and distribute wheelchairs on behalf of a qualified charitable organization such as LifeNets http://www.lifenets.org/, the taxpayer could deduct $70.00 (500 miles x 14 cents per mile). However, if a scoutmaster took a troop of Boy Scouts to summer camp and spent a week there with them, the scoutmaster may not deduct the miles because the trip to the summer camp has a significant element of personal pleasure, recreation, or vacation.

For miles for miles driven for relief efforts related to Hurricane Katrina after August 25, 2005, through December 31, 2006, a taxpayer may deduct 70 percent of the standard mileage rate in effect for business miles. If a taxpayer receives a reimbursement from a charity for miles driven for relief efforts related to Hurricane Katrina after August 25, 2005, through December 31, 2006, the taxpayer may exclude the reimbursement from gross income up to 100 percent of the standard mileage rate for business miles.

The standard mileage rate for business miles was 40.5 cents per mile from August 25, 2005, through August 31, 2005. The standard mileage rate for business miles increased to 48.5 cents per mile from September 1, 2005, through December 31, 2005. The standard mileage rate for business miles driven in 2006 is 44.5 cents per mile (Rev. Proc. 2005-78).

If a taxpayer does not receive any reimbursement from a charity for miles driven for relief efforts related to Hurricane Katrina, the taxpayer may deduct 29 cents per mile for miles driven from August 25, 2005, through August 31, 2005; 34 cents per mile for miles driven from September 1, 2005, through December 31, 2005; and 32 cents per mile for miles driven in 2006 (Rev. Proc. 2005-78).

If a taxpayer receives reimbursement from a charity for miles driven for relief efforts related to Hurricane Katrina, the taxpayer may exclude from gross income up to 40.5 cents per mile for miles driven from August 25, 2005, through August 31, 2005; 48.5 cents per mile for miles driven from September 1, 2005, through December 31, 2005; and 44.5 cents per mile for miles driven in 2006 (Rev. Proc. 2005-78).

In addition to the standard mileage rate, a taxpayer may deduct the cost of parking fees and tolls incurred while driving an automobile on behalf of a qualified charitable organization (Rev. Proc. 2005-78).

If a taxpayer has any doubt about the status of an organization as a qualified charity, the taxpayer may consult IRS Publication 78 at the IRS Web site: http://www.irs.gov/

A taxpayer claims the deduction for miles driven on behalf of a charity on Schedule A of Form 1040. The deduction for miles driven on behalf of a charity is included with the amounts for cash contributions on the same line of Schedule A of Form 1040.

A taxpayer should have good records such as a mileage log to document the deduction. The burden of proof is on the taxpayer to prove the amount of all deductions claimed.

If the taxpayer’s total itemized deductions do not exceed the standard deduction amount, the taxpayer will usually not receive any benefit from the deduction for miles driven on behalf of a charity.

Alan D. Campbell is a CPA in Arkansas and Florida and is self-employed primarily as an author of tax publications. He earned a Ph.D. in accounting with an emphasis in taxation from the University of North Texas. He is also admitted to practice before the United States Tax Court. He has published numerous articles on tax topics in professional journals. He is the co-author of the book Tax Strategies for the Self-Employed and the revision editor of CCH Financial and Estate Planning Guide, 15th edition. For more tax savings strategies, please see his blog: http://taxsavingsstrategies.blogspot.com

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With the recent push by President Bush for alternative fuel strategies, much confusion has arisen regarding tax incentives for hybrid vehicles. This article clarifies the issue for you.

Tax Deductions for Your 2005 Hybrid Automobile

People buy hybrid vehicles for different reason. They are good for the environment. They get much better mileage, which saves money. There are tax incentives for buying them. With the recent energy plan put in place by the federal government, there is a lot of confusion regarding the tax incentives.

Specifically, the question for most people is whether they can claim a tax deduction or a tax credit when they buy a hybrid. Here is the breakdown:

The Good - If you purchased a hybrid vehicle in 2005, you can claim a tax deduction.

The Bad - If you purchased a hybrid vehicle in 2005, you cannot claim a tax credit.

The Ugly - If you had waited till 2006, you could have claimed a tax credit.

Tax credits save you a lot more money than tax deductions. Tax deductions are applied to your gross income like any other deduction. This helps lower your tax bill, but tax credits are much more powerful. Tax credits are not taken out of your gross income. Instead, tax credits are taken out of the exact amount of tax you owe the government. If you owe the government $10,000 after filling out your tax return and can claim a $2,000 tax credit, your final tax bill is $8,000.

You are stuck with a tax deduction tax deduction if you purchased a hybrid in 2005, but at least it is a nice one. The deduction amount is $2,000 for vehicles certified by the IRS. They include:

Ford Escape Hybrid: Model Year 2006

Mercury Mariner Hybrid: Model Year 2006

Lexus RX 400h: Model Year 2006

Ford Escape Hybrid: Model Year 2005

Toyota Prius: Model Years 2001 through 2006

Toyota Highlander Hybrid: Model Year 2006

Honda Insight: Model Years 2000 through 2005

Honda Civic Hybrid: Model Years 2003 and 2005

Honda Accord Hybrid: Model Year 2005

To claim this deduction, you must have purchased a NEW hybrid. If the hybrid was used, you get nothing. Assuming it was new, the deduction is claimed on line 36 of the 1040 form. Make sure to write Clean Fuel in the space provided.

Richard A. Chapo is with BusinessTaxRecovery.com - providing information on tax and taxes. Visit us to read more tax articles and our new tax credits page.

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