Question

Question 7 (0.5 points) Sarah drove 20,000 km in total in 2012, of which 5,000 were for business. She paid $1,000 for insurance, $1,500 for gas, and $500 for maintenance. Assume the test to deduct vehicle expenses are met. How much can Sarah deduct? A/ Question 8 (1 point) Ken received an allowance of $400 per month for 12 months from his employer, for the use of his personal vehicle which he drove for employment purposes. Ken estimates the cost of his vehicle expenses were $5,000 and the vehicle cost $30,000 to purchase. He drove 10,000 km in total during the year of which 2,000 km were for business. Calculate the affect on Ken's taxable income from his vehicle. A

Answer 1

Answer - There are two ways to calculate business use of your car.

First convert km into miles.

Total miles driven = 20000km * 0.621371 = 12427.42 (approx) 12428 miles

Business miles = 5000 km = 3106.85 miles (approx 3107 miles)

(Please note - you dont really have to covert km into miles for calculation using Actual Expenses method since we are only calculating the percentage of miles driven for business with respect to total miles drived. However, for Standard mileage method, it is important to know the distance in miles (and not km) since IRS issues its rate on per mile basis. For example in the year 2012 it was 55.5 cents per mile.)

1) Actual Expenses Method - In this method we will determine how much miles were used for business purpose from the total miles driven. So out of total of 12428 miles, 3107 miles were for business which is 3107/12428*100 = 25%.

This is the percentage of Vehicle's Business Use.

The Vehicle Total Expenses are:-

Insurance +Gas +Maintainance= (1000 + 1500 + 500) = $3000 .

out of which 25% is for business therefore, 25/100*3000 = 750 $ is allowed as deduction under Actual Expenses Method.

2) Standard Mileage Method - Under this method, simply multiply your business miles by the amount per mile allotted by the IRS for that year. Here the year in question is 2012. In the year 2012, the standard mileage rate for 55.5 cents per mile therefore, 3107*0.555 = $ 1724.38 .

55.5 cents into dollars = 0.555

We will choose Actual Expenses Method and deduct $ 3000.

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2) Earning 400*12 = 4800 $

2) 10000 km into miles = 6213.712 miles (approx 6214 miles)

2000 km into miles = 1242.742 miles (approx 1243 miles)

1) If we use the Actual Expenses method = 1243/6214* 100 = 20 percent

Total Expenses = 5000*20/100 = $1000 allowed a deduction.

2) If we use Standard Mileage Method ( assuming the year is 2012 only since it is not given in part 2 of the question). = 1243 miles * 0.555 (55.5 cents per mile) = 689.86 ( approx 690$).

We will choose greater deduction under Actual Expenses Method.

Earning 4800

(Less) Vehicle Expenses (1000)

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Taxable Income 3800

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