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Jump-start business deductions for family-owned cars

by on
in Small Business Tax,Small Business Tax Deduction Strategies

Owning two or more cars costs more than owning one, right? Well, here’s a way that you can make your status as a two-or-more-car family pay off.

Strategy: Swap cars with your spouse. By trading vehicles before the end of the year, you can increase your annual depreciation deduction by thousands of tax dollars.

That’s because you can claim depreciation deductions for both cars—not just one—in the same tax year.

Of course, actual depreciation deductions will vary, depending on your personal circumstances. But you get the picture: Using two cars for business driving is often better than using one.

One pothole to watch out for: If you use either car for business less than 50 percent of its total use, you can’t use the accelerated method of depreciation for that car. Instead, you must deduct the car’s cost over the slower straight-line method.

Example: Say you and your spouse bought new cars earlier this year. Your car cost $50,000 and your spouse’s car $40,000, so both are treated as “luxury cars” for tax purposes.

Normally, you drive about 20,000 business miles each year, plus 5,000 miles in personal travel. Your spouse drives 5,000 personal miles a year in the other car. Therefore, the total annual mileage for the family is 30,000 miles.

As things stand now, you can deduct 80 percent of the cost of one car (20,000 business miles divided by 25,000 total miles). Under the tax rules for luxury cars, the first-year depreciation deduction for a car used exclusively for business is $2,960.

Therefore, your deduction for 2006 normally would be limited to $2,368 (80 percent of $2,960).

But why stop there? Start using your spouse’s car for business and rake in hefty depreciation deductions for both cars.

Let’s go back to our example. Suppose you switch cars with your spouse on Oct. 1. You end the year having driven 15,000 business miles in “your” car and 5,000 business miles in your spouse’s car. You keep using your car for personal travel. So, you still drive 25,000 miles a year, and your spouse still drives 5,000 miles, but now, you hold a big tax difference.

Double your tax pleasure: Since you’re now using your car 75 percent for business (15,000 business miles divided by 20,000 total miles), you can take a first-year depreciation deduction of $2,220 (75 percent of $2,960).

Best of all, you also can claim a depreciation deduction for your spouse’s car. The car is used 50 percent for business (5,000 business miles divided by 10,000 total miles), providing an extra depreciation deduction of $1,480 (50 percent of $2,960).

In effect, you’ve raised your depreciation deduction for 2006 to $3,700 ($1,480 plus $2,220) about 56 percent more than what it would have been!

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