Do you use your own car for business purposes? If so, you may be able to deduct the costs associated with driving for the business portion, up to certain limits. If you use your car for personal reasons as well, only the business portion of costs is deductible.
You can calculate the deduction using one of two methods: standard deduction, a predetermined amount, or the actual expense method, where you figure out the exact cost of your expenses. If you meet the requirements for both methods, your best option is to use whichever one gives you the largest deduction.
The standard mileage rate includes parking fees and tolls, two common expenses incurred during business use. If you want to use the standard deduction, you must meet seven requirements:
- You either own or lease the vehicle
- You drive less than five vehicles at once, and aren’t considered a fleet operation
- A Section 179 deduction hasn’t been claimed on the vehicle
- You didn’t claim depreciation on the car, unless you used a straight line method
- No other special depreciation allowances were claimed on the car
- You didn’t claim any actual expenses after 1997 for a car you leased
- You are not employed as a rural mail carrier that is subject to qualified reimbursements
You have to use the standard mileage rate the first year you use your personal vehicle for business purposes. After the first year, you are able to opt for either method. If you lease your car, you are required to use the standard deduction for the entire time of your lease.
If you want to use the actual expense method, you have to calculate the true costs of operating the vehicle. These costs can include oil, gas, repairs, tires, insurance, registration fees, licensing, and depreciation as it applies to the time used for business purposes.
Expenses like parking fees and tolls are separately deducted, regardless of which method you use.
Generally, depreciation for Cars used after 1986 is the Modified Accelerated Cost Recovery System (MACRS). If you use the standard rate and change the deduction before the car is completely depreciated, you have to use a straight line depreciation for the remainder of the vehicle’s operation. Certain limits apply to depreciation deduction.
You will need significant proof of all of your deduction expenses.
You can’t deduct expenses if you had them reimbursed by your employer or through an accountable plan, as it isn’t included in your W-2s. If you are reimbursed through a non-accountable plan, the reimbursements are added to your wages, and therefore can be claimed as an itemized deduction.
As an employee, you should complete Form 2106, Employee Business Expenses, or Form 2106-EZ, Unreimbursed Employee Business Expenses, and itemize all deductions. You will be subject to the standard 2% modified gross income limit for itemized deductions. Self-employed individuals can deduct car expenses on Form 1040, Schedule C, Profit or Loss from Business, or Form 1040 Schedule C-EZ, Net Profit from Business, or for farmers, Form 1040, Schedule F Profit or Loss from Farming.