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I'm thinking of buying a new car and ponder the tax implications. I'm a real estate broker, owner of my own firm.

OK.

What steps do I need to take in order to make this a legit tax deduction?

Keep track of your business usage and the total usage. Total usage is easy - check the odometer every Dec 31/Jan 1. For business usage, the best documentation is a log of your business trips, with date, miles driven, and puropose of trip. There are lots of blank logs in stationery stores, or programs for your computer or PDA. Most of them will work just fine, as long as you USE IT!!

One idea was to print an ad on the side of the car to serve as a running advertisment.

Absolutely and utterly meaningless from a tax standpoint. The cost of the sign would be deductible as an advertising expense, but that's about all you would accomplish. It has no impact whatsoever on your automobile deductions.

Do I have to use the car exclusively for business? Can I also use it for private trips?

No and yes.

(If I paint an ad on the side of the car, then one could argue that every trip whatsoever is work related since I'm actively advertising, right?)

You could argue that. And many people have tried. And they have universally lost the argument.

Would it be any different if I leased the car?

Some technicalities are different, and mainly relate to the timing of your deductions.

If you lease, you deduct your lease payments, except for an amount known as the Annual Lease Inclusion Amount. That will be from $10 or $20 up to a few hundred, depending on how expensive the car is.

If you buy, you deduct the interest you pay on the loan and depreciation of the cost of the vehicle. The depreciation is subject to limits, depending on exactly what you buy (car, light truck, SUV, large truck) and how much you spend.

In either case, you deduct your gas, repairs, maintenance, insurance and other operating costs. And all of your auto expenses are prorated based on the percentage of business use each year.

You also have an alternative of just deducting a flat mileage rate. For 2005, the rate is 40.5 cents per mile. Once you choose the standard mileage rate, you can't go back to actual expenses for future years.

--Peter
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