Closing Out the Year for Taxes
Now that the holidays are over, it's time to think about other things,
especially taxes. That's right, I said taxes. Please keep reading. I
am going to try to fill this section with helpful, money-saving hints,
ways to stay out of trouble with "Uncle Sam" and give you
a "heads-up" of what is new in 2002.
First, let's address the standard mileage rate. You probably already
know that you can deduct your actual expenses of operating a car for
the business portion of the use of a vehicle. Was that a mouthful? Let's
try an example. If you use your personal car for your business, you
have to keep track of how many "business" miles you drive
in a tax year. (I know that every one of you probably keeps track of
the miles by keeping a small log in the car or writing the information
in a date book or in your PDA.)
So, if you drove your personal vehicle 10,000 miles for business in
2001, and the total miles you drove that vehicle was 14,000 miles, you
would get a business deduction of two-thirds of your vehicle expenses,
such as gasoline, maintenance, repairs and car insurance. But, you do
have a choice to take the standard mileage rate; for 2001, that's $.345
cents per mile. Right, for every business mile you drove in 2001, you
would deduct 34.5 cents from your tax return.
In addition to the standard mileage rate, you can add three other expenses
for the business use of your vehicle:
- If you paid for parking for the car while on business, the parking
fees are an addition to the standard mileage rate.
- If you paid toll fees while using your car for business (do any
traveling in Kansas or Illinois?), the toll costs can be added to
the standard mileage rate.
- If you have a car loan and paid interest on the loan, the business
percentage of the interest is an additional deduction for you.
In our previous example, if you paid $3,600 interest on your car loan
for 2001, and you used your car two-thirds or 66.7 percent of the time
for business, you could deduct $2,400 of that interest as an additional
deduction. Now, that is what I like: legal deductions. Also, you can
still take the business percentage of your personal property tax as
a deduction. In 2002, the rate goes to 36.2 cents per mile.
There are some rules in choosing the standard mileage rate. First,
you must elect the standard mileage rate as the deduction method in
the first year in which you use that vehicle for your business.
So, if you started the business in 2001, you would have to use the standard
mileage rate in 2001 to use it in future years.
Second, if you obtained a new car in 2001 for business use, you
would have to use the standard mileage in that first year to be able
to use it in future years. You will need to keep this in mind each
time you get a new car to use in your business.
In addition, you cannot use your business car for hire—like
a taxi or limo—and take the standard mileage rate.
Last, but not least, you cannot use more than one car at a time
in the business. You can own more than one car, but if you have
two or more cars operating at the same time in the same business, you
must use actual expenses for your deduction.
For more information, you can obtain IRS
publication 463 here, by calling 1-800-829-3676, or by going to
the IRS website at www.irs.gov
and downloading the publication.
Since we got off on the subject of help, did you know that you can
contact the IRS with questions? The general help number is 1-800-829-1040.
You can access this number from 7 a.m. to 11 p.m., Monday through Friday.
This service also will be available Saturdays during the filing season
from January 2 through April 15. You can also leave your email questions
at www.irs.gov. Usually,
you will have an email answer in two or three days.
Here's one more tax tip for your consideration. It involves that area
called depreciation. First, it is legal and normal for
you to have different depreciation methods for accounting or "book"
items and taxes. For most assets, like photocopiers, vehicles, computers
and furniture, you can elect to depreciate an asset in five different
ways.
You can usually expense the whole amount (called a section 179 expense)
or take higher (accelerated) percentages of the costs of the item in
earlier years and take a lower amount in later years of ownership. Or
you can use a straight-line method that basically gives you a steady,
even deduction over the years of ownership. Be careful: The first inclination
is to go for the big dollars in the beginning years. Remember, if you
get rid of the asset before the useful life has expired, or the business
use drops to below 50 percent, you will have to recapture the difference
between the accelerated amount you took and the straight-line amount.
That could hurt if you have a business that constantly increases your
income.
Would you like more information? You can get publication
946 on depreciation here and 544
on sale or disposition of assets here, or from either the toll free
number or our website.
Have a successful year, and best of luck in 2002!
Send this article to a friend
Authored by: Sylvianne M. Doucot, Senior Tax Specialist,
Taxpayer Education and Communications, Small Business/Self-Employed
Division, Internal Revenue Service
Source: Creating Quality Newsletter, Volume 11,
Number 1, January 2002
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