Taxes: Deducting Car Expenses

If you're like most Americans, car expenses take a large chunk out of your monthly income. Payments, gas, insurance, repairs, tolls, parking fees - the list goes on and on. Fortunately, there may be a way to take off these expenses when it comes time to pay your taxes. This can mean a big savings in your tax bill.

Not everybody qualifies to take a car expense deduction. In order for you to be able to take the cost of your vehicle off your taxes, there has to be a direct and provable connection between the use of your car and your business. Commuting, unfortunately, does not count. However, if you are a salesperson, and you use your car to drive around town visiting clients, you will be able to take the deduction. Furthermore, if you work from a home office, you can take off any vehicle expenses directly related to your business - running to the post office to mail something to a client, driving to a business lunch, or even going to the office supply store all count as vehicular business expenses.

If you think that you qualify to take a vehicle expense deduction, you will need to claim your expenses on Schedule C if you are self-employed or Schedule A of Form 1040 if you are an employee.

There are two methods for calculating your vehicle deduction. The first is known as the standard mileage rate. This is the easiest way to determine your deduction - simply take the total number of miles driven for business use and multiply it by the rate the IRS has established. For 2004 this rate is 37.5 cents per mile. For example, if you drove your business care 14,000 miles last year, your expense using this method would be: 14,000 x .375 = \$5,250. However, if you use the same car for business and personal use, you need to figure out what percentage of the time you drove the car for business. This will affect your vehicle expense using the standard mileage rate. For example, let's say, using the previous example, that you drove your car only 65% of the time for business. First multiply the total mileage driven for the year by that percentage: 14,000 x .65 = 9,100 miles of business use. Now take that number and multiply it by the standard mileage rate to get your total expense: 9,100 x .375 = \$3,413.

You cannot take the standard mileage rate if you use your car for hire, such as a limousine or taxicab, or you have five or more vehicles in service at the same time for the same business. However, if you have five different vehicles used for five different businesses, you do qualify to take the standard mileage rate. You can also only take the standard mileage rate if you used it in the first year of claiming car expenses for a vehicle you own. In other words, if you bought the car for business use last year, and didn't claim the standard mileage rate, you cannot claim it this year. Finally, if you use lease your car, you can only take the standard mileage rate if you plan on using it for the entire term of the lease.

If you do not take the standard mileage rate you will need to deduct your actual car expenses. This includes everything related to the operation of the car - depreciation, fuel, parking, tolls, lease/loan payments, repairs, cleaning, even a car stereo. Certain expenses do not count as operating expenses: that parking ticket you never paid last year doesn't get to come off the taxes. Neither do sales tax on the car, or if you're an employee, interest payments on the car loan. However, the actual expense method may work out better for some people. If you qualify to use either method, the best solution is to calculate your expense both ways and see which one provides you with a larger deduction.

The most confusing aspect of claiming actual expenses is figuring the depreciation. You do not figure the depreciation if you use the standard mileage rate, because the IRS has calculated depreciation into the 37.5 cents it says it costs per mile to operate a vehicle. However, if you own your car, and you are not taking the standard mileage rate, you will need to calculate depreciation. You can do this by using the depreciation tables the IRS provides. This allows you to recover the cost of the car over a period of a number of years, depending on how long you think it is going to last. Although you won't get to claim all of the expense this year, the idea is that eventually it will come back to you. However, under a special deduction called a Section 179 deduction, you may be able to take off most or even all of the expense of a vehicle in the tax year it was purchased. For more information, see IRS Publication 946 or consult a tax professional.

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