Small Business Taxes: Avoid Automobile Deduction Errors

There are two key automobile deductions that can be filed as part of your small business taxes. First, you can deduct an expense for each mile driven for business purposes. Second, you can deduct a portion of your car insurance based on how frequently you use your car for work. To determine how much you can deduct, you will need to keep a detailed mileage log for your business bookkeeper.

Keep Mileage Records

When you keep a mileage log, you must record more than just how far you drove. Write down the date of your trip, purpose of your trip, total miles and any business that was concluded as a result of your trip. You can purchase a mileage log from any office supply store. Similarly, if you would like to track your mileage electronically, you can download a template for a spreadsheet online. The important thing to remember is this process is easier if you keep records as you go. Waiting until the end of the month or year to finally record the miles you drove will result in time lost to the administrative task as well as a greater chance of error.

Record Yearly Mileage Driven

For purposes of certain expense deductions, you will need to keep track of the total miles you drove in a given year. This includes all personal errands and miscellaneous tasks. Thankfully, this step is easy if you simply monitor your car's odometer. Each year, know how many miles you put on the vehicle. It is helpful to track this number on your car registration receipt. When you renew your registration, write down the miles currently on your car, and then you will have all of this information in one place. Your vehicle registration fee is typically tax deductible depending on your state, so this receipt will be used to file your taxes.

Determine Proportionate Use

The reason for tracking total mileage is to determine proportionate mileage. Determine what percentage of miles driven were allocated just for business purposes. For example, if you drove 6,000 miles this year and 1,000 of those were for business trips, your car was used 16 percent of the time for business purposes. If only 400 miles were allocated to business, only 6 percent of your vehicle expenses were business related.

Deduct Insurance Accordingly

You can deduct the percentage of your insurance premium equal to the percentage of time your car was used for business purposes. For example, if you used your car 16 percent of the time for business and your premium was $1,200, you could deduct $192 from your tax liability. If only 6 percent of the time spent in your car was for business, you could deduct only $72. If you are looking to maximize your deduction, consider using one of your household cars primarily for business. Keep personal mileage on this car low, and you will be able to deduct a larger portion of your automobile insurance even if your business use is low. Double-vehicle households will benefit from this strategy.