But Wait! There are Caveats!
Nothing is ever this simple with the IRS, right? Of course not! Publication 463 offers stipulations on how to determine which car expenses you qualify for—and often you may qualify for both, so you might want to calculate both to see which is the larger deduction. In our above example, if John was eligible to use either the actual mileage or the actual car costs, it would be prudent for him to use the $0.50 per mile or $5,000 deduction than the $1,900 deduction of actual car expenses.
However, John may not qualify for both according to the IRS.
Time Car Placed Into Service – Let’s say John began using his car in 2008 and didn’t claim the allowed mileage deduction for 2008. In a case such as this, because he chose not to deduct his mileage expense in 2008, in 2010, he must use the actual car expense method. If he would have used the mileage deduction the first year the vehicle was placed into service, in year 2010, he could choose either method, whichever gave him the largest deduction.
Depreciation – Many businesses think they can use depreciation expense as a deduction on tax returns. The true answer here is you can—and you can’t. If you use the MACRS depreciation method of company assets (a vehicle would be an asset), it is considered a capital expense, so depreciation cannot be an itemized deduction as you would benefit from the deduction twice.
Number of Vehicles – Here the IRS delights us again by placing a limit on the number of cars (five) you use for expense deductions. Here’s an example straight from publication 463:
Marcia has one car and four vans she uses for her cleaning business each and every day. Because Marcia has five vehicles in service during the tax year, she can only use the actual car expense method.
But wait! What if Marcia alternated the use of her five vehicles? Here’s another explanation from publication 463:
Marcia has three cars and two vans she uses for her cleaning business. Instead of using the vehicles each and every day, Marcia alternates her vehicles in use or she uses no more than three vehicles at a time throughout the year. Because she alternates her five vehicles, she can use the standard mileage deduction for all five vehicles, but not the actual car expense method.
But--wait! There’s even more from the IRS!