Minimizing Your Tax Obligation - Part I - Auto Expense

While some of you may be on the payroll of a business or even be a 100% shareholder in a LLC photography business, many of you may be on the books of a company as a sub-contractor or you may be a sole proprietor in your own business.

In these last 2 cases you will want to be entirely above board on declaring your income, but you also want to make sure that you take all of the deductions that you qualify for.

In this piece I am going to concentrate on the deductions that may be available to you.

As a bit of background, prior to my involvement in photography, I had spent just about 50 years working in accounting and/or being a CFO. I also have a number of years in Public Accounting where my work was primarily in personal income taxes.
As a disclaimer, before using my recommendations on your return you should consult with a tax consultant to make sure that these ideas are legitimate and that there are not better ideas and suggestions than mine.

This blog will cover an area that has multiple options, and are a little more complicated than some obvious expenses.

Auto Expense -

• Make sure to record you car’s odometer reading on January 1st. If you start your business during the year ten record the reading on that day. I would suggest taking a cellphone photo to record the mileage and to also document the date of the reading.

  1. Record your car’s odometer reading on December 31st or the last day you are in business.

  2. These 2 numbers will give you the total miles driven in your car during the year. Remember to take a photo.

     • If you use a 2nd car, such as your spouse’s car, record the odometer readings on the first day and last day of the year again.

  3. Keep a log on the days you drive a car for something business related. Once again that means record the odometer reading at the start and end of your trip. Make sure you also record the date, destination and your client.

     • Instead of using the odometer readings on jobs where I get mileage I use google.com to tell me the mileage to and from my destination. You can print out the results as supporting documentation.

  4. Your deduction for auto expense can be formulated 2 different ways -

     • Standard Cost per Mile Computation

       • A standard cost per mile computation. For the 1st 6 months of the year you can claim $0.585 per mile driven, and for the 2nd 6 months of 2022 the IRS allows a deduction of $0.625 per business miles driven. In most years there is normally only 1 rate.

       • If you drive 3,000 business miles for the year with 1,500 miles for the 1st six months and 1,500 miles for the last six months you would be eligible for an auto expense deduction of $1,815

         • 1,500 miles x $0.585 = $877.50 + 1,500 miles x $0.625 = $937.50

       • In this method you do not get to take any actual auto expenses. The per mile rate by the IRS takes into account the average cost per mile of the average vehicle. If you have high repair costs for the year, pay high insurance costs, etc. then you may want to examine the second method.

  5. The actual cost of your vehicle.

     • You must keep track of every auto expense for the year including the cost of every gas purchase, insurance, taxes, repairs, registration and any other costs. You will accumulate your total costs for the year and then add in a depreciation expense to recover some of the costs when you purchased that vehicle. If you financed your purchase you can include interest expense. If you are leasing you can forget about depreciation and interest and insert the cost of leasing instead.

     • The final computation is that you need to come up with a percentage of business miles driven vs. total miles. If you have 3,000 business miles and 12,000 total miles your percentage is .25 or 25% (3000/12000).

     • Add up all of your expenses plus depreciation and interest. If that equals $6,000 then you can take an auto expense for use of your car of $1,500 ($6000 x 25%), where 25% is the percentage of business miles compared to total miles driven for the year.

  6. Now compare the standard mile computation of $1,815 to the actual cost of vehicle computation of $1,500. The larger amount is the method you should use in computing auto expense.

     • If the difference in the amounts is negligible the safest option is the standard mile calculation.