1. What's the best way to deduct my business-related auto expenses?
2. Equipment deduction

Q: Is it better to use actual expenses or the standard mileage rate for my car expenses?

A: That question is not as simple as you might think. In fact, automobile expenses are one of the most common tax questions we get. You obviously want to take the largest expense you can for your vehicle; there are a few facts to look at in deciding which method is best for you.

First, how long do you keep your cars? If you drive the same car so long your family thinks you're on hard financial times, the standard mileage rate will probably give you the best tax deduction. But if you want to drive a nice new car every year or two, taking actual expenses will likely be better.

One benefit with the standard mileage rate is how depreciation is calculated. If you buy a car for $15,000, you depreciate it over a five-year period and that's the end of it. The standard mileage rate, on the other hand, has a factor for depreciation built into it.

IRS rules used to state that if you used the standard mileage rate after a certain number of miles you had to use a lower rate to adjust the amount attributed to depreciation. This is no longer the case. You can now continue to use the entire rate for as long as you own the car. Example: Let's say the depreciation portion of the standard rate is 15 cents. On a $15,000 vehicle, you will recover the entire depreciation value of that vehicle after 100,000 miles ($15,000 divided by 15 cents). If you kept driving it after 100,000 miles, you could continue to take a deduction for the amount attributed to depreciation. So if you drove the car 125,000 miles you would have an additional $3,750 deduction that you wouldn't get by using actual expenses.

There are other expenses you should consider before making a decision whether to use the standard mileage rate or actual expenses: insurance, licensing, maintenance, etc. These all have an effect on which method to use. Try to project what these costs will be during the lifetime of the vehicle. The first year you use the car in business is important. If you use actual expenses, according to IRS rules, you must continue to use actual expenses for the lifetime of the vehicle. However, if you use the standard mileage rate in the first year you can switch to actual expenses in later years. A good first-year exercise is to keep track of all your expenses and calculate which method will offer the highest deduction in the year. If you are within a couple hundred dollars between the two you're probably better off using the standard mileage rate, which will give you the opportunity to switch in a later year if actual expenses will give you a bigger expense deduction.

One last consideration: If you lease a vehicle or use more than one vehicle in your business, the IRS says you must use actual expenses. And regardless of whether you use actual expenses or the standard mileage rate, if you finance the purchase of a vehicle you can still take the interest you pay for a car loan as a business deduction. If you have questions about deducting your vehicle as a business deduction, get IRS Publication 917, Business Use of a Car, by calling 1-800-829-3676.

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The IRS allows a business owner to treat all or part of the costs of certain items as an expense rather than a capital expenditure. Since these regulations continually change and tax benefits vary greatly from business to business, consult a qualified tax adviser about the best method for you. Employer Taxes and Tax Deposits Employee withholding are somewhat complex because you have to be concerned with federal, state and local rules. The IRS has two publications to help you: Publication 334, Tax Guide for Small Business and Publication 15, Circular E. Also, local IRS offices offer seminars on how to withhold taxes, when tax deposits are due, how to complete the required quarterly and annual tax returns. Contact your local IRS for more information.

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