10 Jun Maximising your Motor Vehicle Expense Claim
If you have a vehicle that is only used for business purposes, you can claim the full running costs as a business expense. There are stringent IRD conditions that must be met to ensure full deductibility and it is important you discuss these with us when we complete your annual financial statements.
In many instances, there will be a private component that will need an adjustment for tax purposes. Whilst the underlying principle that only the business portion of motor vehicle expenses is deductible, the method used to calculate the private portion depends on whether you are trading as a company or another structure e.g, a sole trader.
For companies, this would typically be an FBT adjustment. The IRD has a set method of identifying the value of private use. Discuss this with us in your next review meeting or email us for our Motor Vehicle Expenses for Companies Tip Sheet as there are ways you can reduce this.
For sole traders and partnerships there is a little more choice as to how the tax deductible portion is calculated. Unfortunately, a little more effort is required because in most instances it will involve keeping a log book. Email us for a copy of our Motor Vehicle Private Use Adjustments Tip Sheet.
Option 1 The Kilometer Method
In this option you keep a log of the kilometers travelled for business purposes and you claim a flat rate per km. The Rate is prescribed by the IRD and updated each year. The benefit of this method is you do not need to keep a records of actual costs and only business trips need to be recorded in your log.
Option 2 – Actual Costs
The Second option is based on the actual motor vehicle costs and the percentage you can claim is dependent on whether you keep a log book.
- Default Rate 25% – No log book
- Costs Apportionment Method – The business percentage recorded in your log book.
You can work out the business use of your vehicle by keeping a logbook for at least 90 consecutive days. During this time you record the date, distance and reason for your trip and this identifies the portion of your motor vehicle use that is business related. Your calculation can be used for up to 3 years (so long as portion of use doesn’t change by more than 20%)
Typically, travelling between home and your place of work is considered private. Exceptions can apply and we recommend you discuss this with us.
Choosing the right method
There is no one size fits all approach, depending on the value of your vehicle, the percentage of business travel and the running costs of your vehicle, along with your personal preference will determine the best method. We can help you choose the right method for you and make sure the highest allowable deduction is claimed.
Like all things tax related it is important to get it right , claiming the highest allowable deduction will reduce your tax bill and getting it right will protect you from audit risk. The IRD are able to review these deductions and if an over claim is uncovered it will result in additional tax to pay, interest and penalties. Please talk with us when we complete your Annual Financial Statements and Tax Returns.