Tax Guide for Deducting Car Expenses

In order to deduct car expenses on your tax return you must have business use. Traveling from one workplace to another while in the area of your tax home is valid business use. (“Tax home” is a specific term, meaning the city where you live and work in most circumstances.) Paying a business visit to a client or a customer is business use, and so is going to a business meeting that is away from your regular workplace, but remember that you have to have a “regular workplace” in order for much of this mileage to apply.

Driving from home to a “temporary workplace,” whether in the area of your tax home or not, is qualified business use if you have a regular workplace. If you don’t have a regular workplace, then the temporary workplace must be outside of your tax home in order to qualify as business use when you drive there directly from home.

A temporary work location is a location that is expected to last for one year or less. When it becomes obvious that the work location will last more than one year, it is no longer temporary, and you may be looking at a shift in your tax home if this workplace is out of town.

If you pick up work assignments from a union hall, and these assignments last for a few months each, then you don’t have a regular workplace, and driving to work within your tax home area is not business use. (Although driving between actual workplaces is business use.)

The miles that you drive from home to your work are commuting miles, they do not count as business miles unless you have an office at home that qualifies as a principal place of business. A home office is more difficult to establish as an employee than as a sole proprietor, but if it is for the convenience of your employer, and if your trip is to a workplace in the same trade or business, then this mileage is deductible.

If you have two jobs in non-related fields, then driving between actual workplaces is business use.

Just having your tools in the car doesn’t make it business use. Having an advertising sign on the car if you are a business owner doesn’t make it business use. Sharing the ride to work with a buddy, and finishing up paperwork or talking about the job doesn’t make it business use. Parking costs and tolls are deductible only if the trip is deductible.

Mileage is the most important aspect of any car expense deduction. The IRS cares about record keeping when they are evaluating the accuracy of a tax return, and a good mileage record is a requirement of car expense record-keeping. Even if you use actual expenses, mileage is the most common way of determining the business use percentage of your vehicle.

Of course, your mileage has to be credible. If you are claiming 46,000 miles in one year, then it has to be presented in an environment that would be likely to produce a lot of driving. Do you actually drive 180 miles a day for business purposes? If you are a management assistant for a busy construction company with several busy sites, then the rest of your tax return has to validate that premise of motion and action. They will look for possible repair costs, gas receipts, constant visits to supply stores, and compensation relevant to that level of responsibility in the company. If you are self-employed they will look for similar evidence of business activity in the form of receipts and 1099s.

But in addition to establishing that it is likely that you actually travel that far for business within a year, they also want to know how you know the exact mileage figure. Estimates don’t count in an audit, and if mileage is one of your principal expenses, the IRS wants to see a daily log. If you have a newspaper route that never varies, they want validation of the number of days in the week that you deliver those papers in the form of an attendance log, and an exact route map, with mileage marked, along with receipts for plastic bags and rubber bands. Mileage is in the range of .50 per mile these days, so with 46,000 miles, you are asking for a deduction of $23,000. Do what it takes to document it. When you get in the car for a qualified trip, then reach for the mileage booklet, jot down the business nature of the trip, note the mileage, and do the same when you get to your destination. It takes a couple of weeks to form a habit, and you will never regret this one. Before you begin to celebrate the new year, make a special note of mileage on December 31st.

Of course, different scenarios apply. Not everyone who takes mileage has a lot of miles to submit for deduction purposes. If you are an employee who files a 2106 (Employee Business Expenses) and your expenses are more than 2% of your adjusted gross income, you still need that log, and you also need to know exactly what trips qualify as business expenses. Do you go to the bank every day? If that is your only business expense, it probably won’t qualify unless the bank is a considerable distance away from the office, but it still doesn’t hurt to keep track of it. The arrangements for reimbursement under these circumstances will vary, but it is doubtful that the IRS will need to see the mileage records unless they are auditing your employer. Your employer, however, is well-advised to require these records from you in a timely manner on a regular basis. If you aren’t being reimbursed, that is a different subject of discussion.

When you are using your own car for business, the standard mileage rate is used instead of depreciation, lease payments, maintenance & repairs, licenses, gasoline, oil, insurance, tires, car washes, windshield wipers, garage rent and vehicle registration fees. In addition, you can take parking and tolls for qualified trips. You can claim personal property taxes (business use percentage) on your vehicle. If you are a business owner you can claim interest (business use percentage.)

But you have to choose. If you choose the standard mileage rate, you must do so the first year that you place the vehicle in service.

If you find the need to claim major repairs at a later date, you must evaluate the extent to which the car is depreciated, and figure straight line depreciation and salvage value (up to the limit of the car’s value.) Even a car fully-depreciated in this way can continue to claim the mileage rate in a subsequent year, but you can never claim accelerated depreciation if you choose mileage in the first year.

Accelerated depreciation, bonus depreciation or 179 expense, plus actual expenses can be a great deduction the first year, but the standard mileage rate will not be an option in later years. The standard mileage rate is not available to corporations, owners who have five or more cars operating at the same time, or other for-hire contractors, or those who receive compensation (like rural postal carriers) under an employer accountable plan.  Beginning in 2011, taxi drivers can use the standard mileage rate.

The actual expenses plus depreciation choice still involves the keeping of a mileage log, in addition to saving all related receipts. The accurate accounting of the business use percentage is essential for the actual expenses method to work. There are limits involving the different choices for 179 expense, luxury car limits, bonus depreciation limits, recapture requirements if you sell the vehicle, and other limits if the vehicle is an SUV, or over 6,000 lbs. If the business use falls below 50%, the ramifications multiply. Making the wrong decision the first year, if it isn’t corrected by the second year, is a decision that you will simply have to live with. There is no way to know whether mileage or actual expenses is best until you see the repair bill 5 years later, or you face bankruptcy before the cost of the vehicle is recovered. There is more information on “Actual Expenses” and the “Standard Mileage Rate.”  Search for IRS Publication 463, travel, entertainment, gift, and car expenses at

So keep an envelope for receipts next to the mileage log book. Electronic filing will require the make, year and model of the vehicle, sometimes the unloaded gross weight, the year you bought it, how much you paid for it, and when you put it in service. You or your accountant will need all the detail that you can provide, no matter which method you choose, in order to make an informed choice of what will serve you best over the life of your vehicle.