Tax Deduction for Business use of a Car

If you use your car for your business, you may deduct certain automobile-related expenses from your taxes.

Business use of a car would include driving to and from customers, suppliers, business associates, or seminars or promotional meetings, as well as out of town business trips by car.  All else is personal use.

Note what is missing from the above list.  Commuting to and from your principal place of business does not constitute business use of a car.

There are two methods by which you may calculate your deductible expenses for operating your car for business purposes.  One is the “standard mileage rate” and one is the “actual expense method.”

In order to qualify to use the standard mileage rate, you or your company must own or lease the car, the car must not be used to transport people or property for hire (e.g., a taxi), you must not operate a fleet of five or more cars, you must not have claimed a depreciation deduction on the car in an earlier year, and you must have used the standard mileage rate at least the first year you claimed the deduction.

The amount of the standard mileage rate varies from year to year.  For 2009 it is 55 cents per mile.  For 2010 it is 50 cents per mile.

As indicated by the name, if you instead use the actual expense method, you will have to figure the actual costs of operating the car, including gas, oil, maintenance, tires, insurance, registration fees, licenses and depreciation.

Auxiliary expenses such as tolls and parking are not included here, however these can generally be deducted as business expenses elsewhere on your return, regardless of whether you use the standard mileage rate or actual expense method.

If you qualify to use the standard mileage rate, you should figure your taxes by both methods first, and then use the one that results in the greater deduction.

One complicating factor is if you use a car both for business and personal use.  In that case you can only deduct the business portion of your use.  So for example, if you are using the actual expense method, and it cost you $5,000 to operate a car where 30% of the miles you drove were business use and 70% were personal use, you would use a figure of 30% of $5,000. or $1,500.

Whichever method you use, be sure to keep all receipts and documentation in case of an audit.