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Choose a Method
The Internal Revenue Service (IRS) offers up Publication 463, a 59-page novella that includes how to calculate automobile operating expense for business use. You can find a link to the publication in the references section, or you can use the tips found here!
Basically Publication 463 explains you can determine allowed expenses in one of two ways:
Take the allowed mileage deduction or $0.50 per mile and toll expenses or,
Use the actual car expenses for the year – These expenses include, tires, licenses, gas, oil, lease payments, insurance, garage rent, parking fees, registration fees, and repairs.
Let’s look at an example of each of the above expense deductions.
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The current allowed mileage (2010-2011) is $0.50 per mile, meaning for every “business” mile you drive, you can claim fifty cents for each mile. Under the allowed mileage example, any tolls you pay can also be used as an expense. Example:
John drove 25,000 miles in 2010; however, only 10,000 miles were actual business miles. He also paid $100 in toll charges in 2010.
Total Mileage deduction - $10,000 x .50 = $5,000
Tolls Paid: $150
Total Deduction allowed - $5,150.
Keep in mind when using the allowed mileage calculation you must keep a record of actual business mileage traveled in a log as a backup plus all your toll receipts.
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Actual Car Expense
If you choose to use the actual car expense, you must also keep receipts for those expenses and total them up at the end of the year. Example:
John had the following expenses for his business vehicle in 2010:
Tolls - $150
Gas - $500
Parking Fees - $250
Repairs - $1,000
Total Deduction Allowed - $1,900
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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!
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If you drive a taxi, you can’t utilize either the mileage deduction or the actual vehicle costs, the taxi cab company you drive for most likely will claim a depreciation expense.
Using five or more cars at the same time in the same year is a no-no and will disqualify you for either expense calculation.
When the car was placed into service is a biggie with the IRS—if you only used the vehicle for one month during the tax year, you can only claim one month’s mileage or actual expenses.
Theft or casualty losses can’t be claimed as a line item using the form provided in Publication 463. You can, however, visit the IRS and read publication 547 and you may be able to claim losses or costs of stolen items you had to replace.
Traffic tickets or parking violations are disallowed.
If you pay to park where you work, this is not considered a traveling parking fee that is deductible as an expense.
Your best bet on how to calculate automobile operating expenses is to determine if you can use either the mileage deduction or the actual car cost deduction or both and see which deduction will offer the highest tax break. If you travel quite a bit throughout the year, you’ll probably be better off utilizing the mileage calculation. Finally, check the IRS annually as mileage deduction allowances do change from year to year, however, publication 463 will always be your guide as it is updated when mileage deductions and other rules are changed.
You can also download both Publication 463 and 547 from links in the reference section for further information.
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