I had this question posed to me recently so thought I'd offer up more on it here.
If you use your car in your job or business and you use it only for that purpose, you may generally deduct its entire cost of operation (subject to limits). However, if you use the car for both business and personal purposes, you may deduct only the cost of its business use.
You can generally figure the amount of your deductible car expense using one of two methods: the standard mileage rate method or the actual expense method. If you qualify to use both, then you may want to figure your deduction both ways beforehand to see which gives you a larger deduction. Take a look at IRS Publication 463, Travel, Entertainment, Gift and Car Expenses, for more.
If you use the standard mileage rate (currently 55.5 cents/mile as of Jan. 1, 2012 for business miles driven), you can add to your deduction any parking fees and tolls incurred for business purposes.
To use the standard mileage rate, you must own or lease the car and:
- You must not operate five or more cars at the same time, as in a fleet operation
- You must not have claimed a depreciation deduction using the Modified Accelerated Cost Recovery System (MACRS) on the car in an earlier year, including any additional first-year depreciation or "bonus depreciation" or any method other than straight-line for its estimated useful life
- You must not have claimed a Section 179 deduction on the car; and you must not have claimed actual expenses after 1997 for a car you leased, and
- You cannot use the standard mileage rate if you are a rural mail carrier who received a "qualified reimbursement"
Further, to use the standard mileage rate for a car you own, you must choose to use it in the first year the car is available for use in your business. Then, in later years, you can choose to use the standard mileage rate or actual expenses. For a car you lease, you must use the standard mileage rate method for the entire lease period (including renewals).
In using the actual expense method, you must then determine what it actually costs to operate the car for the portion of the overall use of the car that is business use. You Include gas, oil, repairs, tires, insurance, registration fees, licenses, and depreciation (or lease payments) attributable to the portion of the total miles driven that are business miles.
Other car expenses for parking fees and tolls attributable to business use are separately deductible, whether you use the standard mileage rate or actual expenses.
Much more on this is available on the IRS website. Here are some excellent sources of information on the subject:
- For additional information about depreciation, click here (this will lead you to IRS Publication 946 as well. Pub 946 is the depreciation publication)
- For more on recordkeeping, read IRS Publication 552, Recordkeeping for Individuals
- For more on unreimbursed business (employee) expenses, click on this tax tip
- And finally, here is the link to IRS Pub 463 again--it's quite comprehsensive!
