The most common tax deduction for small business owners is motor vehicle expenses. It is also one of the most common deductions for people who earn salaries and wages. Because of the number of people that claim a tax deduction for motor vehicle expenses it is one of the most highly regulated areas of income tax law.
The rules that apply to the tax deductibility of motor vehicle expenses apply equally to both business and employed taxpayers. The overriding principle applied to motor vehicle expenses is a claim can only be made for the business or employment related costs, and a tax deduction is not available for private motor vehicle costs.
Q. I have just read about claiming vehicle expenses at tax time. I have started a business from home and paid $7000 for a car to be able to run my small business. Can I claim anything at tax time on the $7000 I paid to buy the car?
A. There are three main options ways that you can claim motor vehicle expenses against your business income. The first is the kilometre method, the second is the one third of running costs method, and the last is the actual business usage method. The last two options will effectively result in a claim for part of the cost of the car you purchased.
If you purchased your car between July 1, 2013 and December 31, 2013 you can claim a tax deduction for $5000 of the cost, with the balance of the $7000 cost included in your depreciation pool assets. If the car was purchased after December 31 you can only claim depreciation on the $7000 cost.
Under the kilometre method you do not need to keep a log book but must be able to reasonably prove the number of business kilometres you drive each year. The tax-deductible amount is calculated by multiplying the business kilometres by a rate that differs depending on the size of the engine in the motor vehicle. The maximum number of kilometres that can be claimed is 5000.
The one third of operating cost method can be used if you can show that you drive more than 5000 kilometres a year on business. Under the log book method you must keep a record for 12 weeks that proves the actual number of business kilometres driven over that period. Whatever the business kilometres are as a percentage of the total kilometres driven for that period will be the percentage of the running costs that can be claimed.
Running costs for the vehicle include fuel, repairs, registration, insurance, interest on a loan taken out to purchase the vehicle, and a depreciation claim for the cost of the vehicle. Where a lease is used to purchase a vehicle the lease payments are included in the running costs.
If you use the last two methods, and your vehicle was purchased after December 31, 2013, you will be able to include 15 per cent of the $7000 cost as depreciation in this first year as a running cost. For subsequent years you can include 30 per cent of the written down value of the vehicle as a running cost.
Questions on income tax and other issues can be emailed to firstname.lastname@example.org
Max Newham is the founder of www.smsfsurvivalcentre.com.au