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Shift to ‘actual cost’ car deductions to offset high gas prices

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in Small Business Tax,Small Business Tax Deduction Strategies

The cost of gas continues to skyrocket in many parts of the country, reaching a record national average of $1.75 per gallon at the start of April. Most expensive state: California. Least expensive: Georgia and South Carolina.

Bad tax news: Since you're shelling out more at the pump, you're probably forfeiting valuable tax deductions if you use the standard cents-per-mile rate to deduct business car expenses.

Strategy: Switch to the "actual expense" method to deduct your business driving costs. Even if you don't change your recordkeeping habits until midway through the year, you can still come out ahead on your 2004 tax return. Obviously, the sooner you make the switch, the better.

Before you make the switch, however, realize this: Once you begin using the actual-expense method, you can't switch back to the standard mileage method for that car. And if you started using the standard rate for a leased car, you must continue to use it for the entire lease period. Here's the whole story:

More hassle, but bigger write-off

When you use your vehicle for business driving, you can deduct out-of-pocket expenses (e.g., gas, oil, repairs, insurance, etc.) attributable to business use, plus a depreciation allowance based on your business-use percentage. If you lease a car, you can write off the portion of the lease payments attributable to your business use.

As an alternative, you can choose to take a per-mile write-off, based on the IRS-approved standard mileage rate. For 2004, the standard rate is 37.5 cents for every business mile (not including tolls and parking fees). The same rules apply to leased cars.

The best part about using the per-mile rate is that you don't have to keep track of every fill-up, oil change and tire rotation. (You do need to document the date, place and business purpose of each trip.)

The cents-per-mile method may mean less hassle, but even in the best of times, the per-mile rate won't likely be high enough to cover all of your actual business-driving expenses. And with gas prices going through the roof, that's even truer today.

Make the midyear switch

Bottom line: If you're regretting your decision to use the standard mileage rate, stop now!

By switching to the actual-expense method midway through the year, you can still recoup your fair share of costs on your 2004 tax return. (See example in box below.)

If it's possible, you can increase your deduction even further by reconstructing some actual expenses from earlier in the year. Just be prepared to prove the expenses if the IRS challenges your deduction.

Buying a car in 2004?

If you're buying a car in 2004 that you'll use for business, your decision is a no-brainer: Use the actual-expense method and claim a 50 percent bonus depreciation deduction for the car (in addition to the regular operating expenses).

Another option: You may be able to write off most, if not all, of the vehicle's cost under Section 179 if it's a "heavy" SUV, pick-up or van (with gross vehicle weight rating above 6,000 pounds).

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