When you use a vehicle for business purposes, you can deduct the business portion of the operating expenses on your tax return. If you use it only for that purpose, you may deduct its entire cost of operation (subject to limits discussed later). However, if you use the car for both business and personal purposes, you may deduct only the cost of its business use. You can generally determine the expense for the business use of your car in one of two ways: the standard mileage rate method or the actual expense method. If you qualify to use either method, figure the deduction both ways to see which gives you a larger deduction. If you use the standard mileage rate, add any parking fees and tolls incurred for business purposes.
Standard Mileage Rate Method:To use the standard mileage rate, you:
- Must own or lease the car,
- Cannot use it for hire, such as a taxi,
- Cannot operate five or more cars at the same time,
- Must not have claimed a depreciation deduction for the car in an earlier year, and
- Must have chosen to use it in the first year you placed the car in service at your business.
Then, for a car you own, in subsequent years, you can choose to use the standard mileage rate or actual expenses. However, if the car is leased, you must use the standard mileage rate method for the entire lease period. The standard mileage rate is determined by the government annually.
Actual Expenses Method: To use the actual expense method, you determine the entire actual cost of operating the car for the year and then determining the business portion attributable to the business miles driven. As an example, a vehicle’s operating costs for the year totaled $7,000; it was driven 6,000 miles for business, and 10,000 total miles. The business portion would be 60% (6,000/10,000) of $7,000 or a business deduction of $4,200. Operating expenses include gas, oil, repairs, wash and wax, tires, insurance, registration fees, depreciation (or lease payments). The actual expense method can include interest paid on the car loan when deducted on business returns. However, the interest deduction is not allowed for employees deducting car expenses as part of their itemized deductions. Parking fees and tolls attributable to business use are also deductible.
Generally, cars are depreciated using an accelerated method of depreciation subject to the luxury auto rules, which limit the amount of allowable depreciation that can be deducted in a year. If the standard mileage rate was used in the first year the car was placed in service and you decide to switch to the actual expense method for a later year, straight line depreciation must be used and subject to the same luxury auto limits.