The Best Way to Deduct Car Expenses
If you use your personal car for business, you can choose one of two ways in which to deduct the cost of business travel – the actual expense method or the IRS standard mileage rate. Unless you are barred from using the standard mileage rate (discussed below), the choice is yours. Understand the two methods and then factor in your particular circumstances to make the decision that will allow you the greater write-offs.
Actual expense method
This method lets you deduct all of your out-of-pocket costs for operating your car for business, plus an allowance for depreciation if you own your car. Actual expenses include gas and oil, maintenance, garage rent, insurance, towing, parking and tolls, and, if you lease your car, lease payments. Whether interest on a car loan is deductible depends on your employment status: If you are an employee of your corporation, the interest is not deductible, buy if you’re self-employed, the interest is deductible.
To use the actual expense method you must track your business mileage, including odometer readings for each business trip, and retain receipts for deductible expenses.
Be sure to not the odometer reading on January 1 and keep a logbook handy in the car to continue tracking your business mileage throughout the year.
Standard mileage rate
This method lets you deduct a flat per-mile rate fixed annually by the IRS. For 2005, the rate is 40.5¢ per mile. This means that if you drive 25,000 miles for business in 2005, you can deduct $10,125 (25,000 x 40.5¢).
To use the standard mileage rate you must track your business mileage, including odometer readings for each business trip, buy you do not need to save receipts to prove business costs related to the car. That’s what the standard rate does for you.
Caution: You cannot use the standard mileage rate if you use your car for hire (e.g., as a taxi) or you have already claimed depreciation or expensing on your car (i.e., you used the actual expense method in a prior year).
Which method to choose
The choice depends on many factors, including the number of miles you drive for business and the extent of your actual expenses. As a rule of thumb, if you drive a great number of miles each year, the standard mileage rate may offer the greater deduction.
It is important to note that the standard mileage rate is not dependent on the price of the car – you obtain the same write-off for a Chevy Aveo (priced under $10,000 for a 2005 model) as you do for a BMW 760 (priced over $100,000 for a 2005 model).
It is generally wise to keep receipts throughout the year; that way, when you prepare your return, you can choose the method that provides the greater write-off.
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