A tax deduction question we often hear is, "What are my options for deducting my automobile expenses?" The Internal Revenue Code allows for two methods for deducting automobile expenses incurred for business use purposes, the standard mileage rate method and the actual expense method. Are you using the best method for you?
To take a deduction using the standard mileage rate method the taxpayer keeps track of the number of business miles driven for the year. The deduction is calculated by multiplying the number of business miles times the standard mileage rate in effect for the tax year. In addition to the calculated deduction the taxpayer would be allowed a deduction for the business use portion of any loan interest and license plate fees.
To use the standard mileage rate a taxpayer must choose that method the first year the vehicle is placed in service. In subsequent years the taxpayer can alternate between the standard mileage rate and actual expense method, utilizing the one that achieves the greatest deduction for that year. In years where the taxpayer elects the actual expense method depreciation is limited to the straight line method of depreciation.
The standard mileage rate deduction is not allowed to a taxpayer who operates five or more vehicles for the same business, on vehicles that the taxpayer elected to use accelerated methods of depreciation, or vehicles that the taxpayer elected to take Section 179 Expense in the year the vehicle was place in service.
If you elect to use the actual expense method to determine your business deduction you need to track all expenses incurred in operating the vehicle, such as gas, maintenance and repairs, loan interest, license plate fees and lease payments. In addition the taxpayer would be entitled to a depreciation deduction. The amount of the depreciation deduction will be limited based on the type of vehicle the taxpayer is driving. Once you have calculated your total expenses you will then multiply that total by the business use percentage (business miles divided by total miles driven for a year) times the total expenses.
If you have questions about determining which method will generate the larger deduction over the life of your vehicle, we'd be happy to help with a complimentary accounting consultation:
Image Credit: Miali