When you use a vehicle for business, you can often deduct expenses relating to the vehicle. There are two methods to deducting vehicle expenses: actual cost, and standard mileage rate.
Standard Mileage Rate
The standard mileage rate is the more simple method. You keep track of the business miles driven (through your odometer) and at the end of the year multiply that by the standard mileage rate. 2015 has a mileage rate of 57.5 cents per mile.
Actual Cost Method
Actual cost method takes all of the expenses towards your vehicle and deducts those expenses up to the business portion that you use your vehicle. Some of the expenses that qualify are:
- Gas and oil
- Maintenance and repairs
- Registration fees and taxes*
- Vehicle loan interest*
- Rental or lease payments
- Garage rent
- Tolls and parking fees*
*Also deductible if you choose the standard mileage method.
The surest way to figure out the business use for your vehicle is to keep track of miles. If you have 50% business use of your car, then you would deduct 50% of the expenses mentioned above.
Which method is best for you?
Typically if you have an economical car, the standard mileage rate is more beneficial. If you have a vehicle with a higher cost of maintenance, the actual cost method may be more beneficial. I like to suggest figuring both methods out at tax time and deciding which one is most beneficial.
It’s important to note that you cannot take depreciation on a vehicle that you are deducting the standard mileage rate on. The IRS has factored in depreciation to be included in that rate. If you are using the actual cost method however, you may use depreciation in addition to the expenses.
Employee use of Vehicle
If you are employed and use your vehicle, you can deduct your vehicle expenses on Schedule A (itemized deductions). But if you are reimbursed for your vehicle expenses, you cannot deduct them on your tax return.
Accounting for vehicle expenses can seem tedious, but it is always worth it. The expenses and miles add up very quickly and often amount to a sizable deduction that can make quite the difference in your tax return.
Be sure to keep good records. This is a hot button for the IRS. A good way to prove your expenses is to get a vehicle log book, and track your miles and expenses throughout the year.