You can deduct expenses for a vehicle that you use for your business. If you use the vehicle for both personal and business purposes, you can deduct only the costs for business use. You calculate your business use percentage by dividing the number of business miles driven by the total number of miles that you drove during the year.
Example: If you drove a total of 10,000 miles during the year and the total number of business miles that you drove was 7,500, then 75% of the miles driven were for business:
7,500 (Business miles) / 10,000 (Total mileage) = .75 (or 75%)
This means that you can deduct 75% of your expenses. Commuting miles, which is the distance you drive from home to work, aren’t deductible. However, you can deduct the cost of traveling from one business location to another.
When calculating your expenses, you can use either the standard mileage rate or the actual expenses method.
Under the standard mileage rate method, you multiply the number of business miles that you drove by the standard mileage rate. For 2007, the standard mileage rate is 48.5 cents. In addition, you can deduct the cost of parking fees and tolls that you incur on business. You can’t deduct the amount that you pay for parking at your place of employment, however.
If you’re self-employed, you can also deduct the interest on your car loan that is related to your business use of the car. For example, if you use your car 75% of the time for business, you can deduct 75% of the interest paid. If you’re an employee, though, you can’t deduct any interest paid on a car loan.
You can also deduct the business portion of personal property taxes that you pay on your vehicle. Personal property taxes, such as a city excise tax, are taxes that you pay based upon the value—not the weight—of your vehicle.
Under the actual expenses method, you can deduct the actual expenses of owning and operating your car, such as license plates, gas, oil, tolls, insurance, garage rent, parking fees, registration fees, washing and polishing, repairs, and tires. You can also deduct depreciation if you own the vehicle. If you lease a vehicle, you can deduct the lease payments related to the business use of your car. For example, if your lease payments are $3,600 and you use the car 75% of the time for business, you can deduct $2,700.
If on the first day of the lease term, your vehicle’s fair market value exceeds certain amounts—$15,500 for a lease beginning in 2007—the amount that you can deduct as a lease payment is reduced by an amount called a lease inclusion amount. Lease inclusion amounts are obtained from tables provided by the IRS in IRS Publication 463, Travel, Entertainment and Gift Expenses.
You can’t use the standard mileage rate if:
You’ve used the actual expenses method in a prior year,
You use the car for hire such as a taxi, or
You use five or more vehicles in your business at the same time.
If you qualify to use both methods, TaxCut lets you compare both methods and choose the one that gives you the bigger deduction.
Make sure to keep receipts, canceled checks, and bills for expenses incurred to support the deductions you take. You should also maintain a mileage log to keep track of your mileage for the year. For each trip that you take, include the date, miles traveled, destination, and the purpose of the trip (for business, personal use, or to commute to work).